| Front page | | Contents | | Previous | | Next |

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

Chapter 4.
Institutional Framework and Political Acceptability Analysis.

This chapter is based on interviews with City Administration officials and representatives of political parties, and the political acceptability of increases in cold water tariffs is discussed.

4.1 The framing of the water issue

There is no doubt an intention among prominent representatives of the city administration to increase water tariffs. This intention is due to a principal acknowledgement of the rationale of full costrecovery. The administration would, in principle, also prefer, that the repayment of the EBRD loan could be covered by revenue generated solely by the Kaliningrad Vodokanal, - and not by the city budget / tax payers in general.

However, these considerations should be viewed in contrast to those which tend to lead to a slow adoption of a cost recovery policy, namely:

	Widespread concern over the social impact, i.e. that higher water tariffs are unaffordable to major segments of the population;
	The lack of an automatic inflation adjustment mechanism for water tariffs and the fact that water tariff changes have been irregular since 1996;
	The fact that if the cost of municipal services make up 19% or more of a household net income, this household is entitled to a social subsidy. This will lead to some spill over of higher tariffs in higher municipal expenditures for social purposes. The benefits of targeted subsidies do not seem to be appreciated by politicians and city administration officials.
	Apparently, at Federal level, it is currently being discussed whether the date for full cost recovery for municipal services from the year 2003 should be postponed until the year 2008. This lessens the pressure on the Kaliningrad political-administrative system to implement full cost recovery tariffs;
	The city administration has not yet developed a strategy on how to implement a costrecovery policy for the water and wastewater services. It is our impression that the City is finding it very difficult to decide how to deal with the many conflicting objectives;
	Some of the civil servants interviewed have a rather relaxed or realistic attitude towards the water tariff issue, stating that full-cost allocation to the consumers easily may take a period of 10 years to achieve.
	Part of the city administration seems quite prepared to repay the water loans (partly) via the city budget, if the tariffs do not generate a sufficient revenue stream the coming years. However, it is not clear to the team whether the city has calculated how this would impact on their ability to maintain other expenditures.

4.2 The service level issue

Representatives of political parties see the drinking water quality issue as being very high on the political agenda in Kaliningrad. Drinking water quality is particularly discussed in terms of regularity of supply and hygienic water quality. There is a wide spread perception (which is partly wrong as discussed above) that it is unhealthy to drink the water in Kaliningrad.

Surprisingly there is limited concern among political representatives about the absence of wastewater treatment in Kaliningrad. However, the population interviewed assigns high priority to achieving a clean aquatic environment in the river and bay.

This "bias" in the perception of what is important, in relation to the cost structure of the proposed project has implications for the way in which the benefits of the project and the tariff increases, resulting from the project, should be presented. It seems that there is a need to emphasise the benefits of the wastewater treatment component and to consider, carefully, how the tariff increases are explained to the po-pulation.

4.3 Tariffs regulations

A number of federal regulations influence revenues from municipal utilities. In our view these federal regulations are not always clear. They may be subject to interpretation and they may in certain cases be internally inconsistent.

The key regulations are:

	Decree of the President of the RF dated April 28, 1997, #425 «On the reform in the communal services in the Russian Federation»;
	Ordinance # 66 «On introducing a regional standards (for 1999) of transition into a new system of payments for communal services in Kaliningrad Oblast» issued by Head of Kaliningrad Oblast Administration on February 16, 1999.

According to the presidential decree and its regional implementation:

	the share of payments by the population for communal services is (to be) 60% of the total costs of communal services (maintenance and repair of houses, including capital; heat supply, water supply, gas supply, electricity supply); and
	the maximum allowable share of household expenditure for (payment for) houses and communal services in total household income, calculated based on social norm of consumption of communal services - is (to be) 19%2.

Furthermore, the payments of municipal services is regulated by:

Regulations No.5- Ö3 «On veterans», No. 181- Ö3 «On social protection of invalids in the Russia Federation», No.3062-1 «On social protection of population which was influenced by radiation due to Chernobyl Nuclear Power Station catastrophe», No.1761-1 «On rehabilitation of victimised people due to political repression», No. 98- Ö3 «On the status of the heroes of USSR and RF and Cavalier of Order of Honor of 1st, 2nd and 3rd degree», etc. and by privileges to 43 specified segments of the population stating that households belonging to these groups only pay a part (typically 50%) of the water and wastewater tariff, cf. list in Appendix 2. The rest is to be paid by federal and municipal authorities to the Vodokanal.

4.4 Tariffs for municipal services

In general, all municipal services are paid according to norms, though there are about three thousand households which pay for cold water according to the meters. Only gas and electricity are paid according to consumption. Table 4.1 illustrates the costs of municipal services plus gas and electricity. As an example we have chosen the costs for one person living in a one-room apartment. Specific costs will depend on the number of persons and the size of the apartment as well as on actual consumption for gas and electricity.

Table 4.1:
Cost of municipal services in Kaliningrad 01 Nov 1999 - one person living in a one-room apartment

The table illustrates that the level of cost recovery differs widely from service to service. For most of the services the cost recovery is above the 60% mentioned in the presidential decree, but the present cost recovery is quite low for central heating and hot water³. Furthermore, the table illustrates that even using official full cost recovery figures consumers still only pay approximately one third of the "full cost" of these services. As a total this seems to be significantly below the 60% mentioned in the presidential decree.

Both characteristics indicate that the price of municipal services is set through a negotiation process rather than as the result of clear and transparent regulations.

4.5 A note on social considerations

Social considerations are high on the agenda of policy makers and administrators in Kaliningrad. Table 4.2 illustrates the share of the cost of municipal services in total income for two typical family types.

Table 4.2:
Monthly cost of municipal services, gas and electricity relative to income for two typical household types - Kaliningrad 01 Nov 1999

The table illustrates that social considerations are very important in order to assess the affordability of full cost recovery of municipal services because the ability to pay full cost recovery tariffs differs widely between socio-economic groups. A typical pensioner will clearly not be able to pay full cost recovery tariffs. At the same time a typical wage earner may still pay a smaller share (of a higher income) if he had to pay full cost recovery tariffs for all municipal services than the typical pensioner pays today. The issue is further elaborated in Chapter 6.

There are currently two types of regulation in force to protect the weaker social groups. One regulation states that persons who can demonstrate that their expenditure for municipal services exceeds 19% of their income can apply for a subsidy. Only few households (approximately 4,000 households or 2% of the total) have applied for such a subsidy.

The lists of so-called privileged categories of the population constitute the other regulation. In Kaliningrad 43 groups composed of between 5 persons and more than 60,000 persons generally pay only 50% of the expenditure for municipal services.

4.6 The tariff setting process

The Kaliningrad municipal authorities are responsible for setting and inflation-correcting the water tariffs. Until mid 1996, the tariffs were corrected for inflation on a quarterly basis but since then the adjustments have become fewer and correspondingly more drastic.

4.6.1 Description of current situation

The tariff setting process is illustrated in Figure 4.1.

Figure 4.1:
Overview of current tariff setting process

Several aspects should be noted. Firstly, no direct political influence is exercised, as it is not within the competence of the city council to deal with water tariffs. The decision-making is very much an internal administrative affair that invol-ves a range of city administration departments.

Secondly, no anti-monopoly authorities are involved. The Price Control Unit somehow guards consumers' interests. However, this unit should also serve the interest of the Vodokanal; hence it sees itself primarily as the one securing that proper decisions in line with tariff formulas are being taken rather than "the consumers voice".

Thirdly, the process is closed. Neither environmental groups nor industry representatives have a say during the process. The representatives of the organisations that we have interviewed express that, not only do they have no influence on water tariff policy, they have very little information about ongoing discussions about the water and wastewater service level and tariffs. In that way the city administration "protects" itself from the Non-Governmental Organisations. The cost hereof may be that the rationale of water pricing is not being spread widely within the civil society.

Fourthly, the current system of setting tariffs effectively leaves the Mayor's office with the right to veto the tariff.

Finally, it should be remarked that a number of departments within the city administration have to approve the new tariffs. Until now, this has taken place informally but also somewhat chaoticly. Therefore a new structure, which is briefly described below, has been planned.

4.6.2 The Proposed Inter-Departmental Co-ordination Unit

It is currently under consideration whether to establish an inter-departmental coordination unit aimed at formalising, what is now an informal, co-ordination and negotiation process between the departments. The departments should be represented by high-ranking civil servants having autonomy and "weight" to take decisions on behalf of the department that they represent. The interdepartmental co-ordination unit will also include the representatives from the largest enterprises in the city. For an overview of the new structure see Figure 4.2.

Figure 4.2:
The proposed structure for the water tariff setting process

The proposed structure is justified on the grounds that water tariff increases have several practical consequences and therefore should be co-ordinated. If this is the case the new structure definitely seems logical and is an improvement vis-à-vis the existing situation.

Rather than being a purely technical-administrative forum the new unit could develop into an arena for bureaucratic policy-making where the various departments would seek to maximise influence over the direction and content of the water pricing policy. In order to avoid this, it is important that the politicians lay out unambiguous principles for water pricing to secure that the new forum only performs the role of coordination.

4.6.3 Who actually decides water tariffs?

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 wa-ter and wastewater utilities in the CEE.

The municipal administration, which formally is responsible for approving new tariffs, is constrained by a number of federal regulations. Perception of the rigidity of these constraints differs. A number of persons interviewed within the administration including the Price Control Unit of the Housing and Communal Services Department have expressed that the federal regulations on tariff setting leave little room for interpretation and negotiation. However, we do not share this view.

In our opinion, the tariff setting process has many characteristics of a political / administrative bargaining process under unclear (and dynamic) rules. We base this judgement on the design of the tariff setting process, the many revisions to tariff proposals which occur during each "round" of tariff approval and the lack of consistency in adherence to federal regulations. The latter may be exemplified by the wide difference in officially calculated cost recovery between, say, hot and cold water, cf. Table 4.1 above. The federal regulation does not distinguish in between hot and cold water.

The Mayor, who is able to veto any proposal and the Vice Mayors and Heads of Departments who have to approve the tariff proposals each have significant influence on the tariff setting process. Their influence is enhanced by the close character of the process.

Politicians, environmental groups, consumer and industry representatives have little or no direct influence on the process of setting water and wastewater service levels and tariffs. Effectively politicians, NGOs, consumer and industry representatives who want to influence the process will have to attempt to influence the process directly via the Mayor or via these bureaucrats.

4.6.4 Conclusions

In relation to the tariff setting process three conclusions emerge:

Due to the complexity and lack of internal consistency between the regulations, in reality the issue of setting of water tariffs is negotiable. However, a large number of actors are actually or potentially involved.

Water tariffs cannot be analysed in isolation, but must be analysed jointly with tariffs for other public services such as rent, heating and power. There are two reasons for the latter point: Household budgets are so tight that ability to pay for one municipal service depends on the cost of the other. Households for which total costs surpass the threshold of 19% of income are eligible for a subsidy. Thus simultaneous changes in charges for municipal services may have spin-off effects on municipal expenditures through the subsidy mechanism. These spin-off effects need to be taken into account.

The regulations formally link the tariffs together (stating that on average there should be 60% cost recovery).