Water Prices in CEE and CIS Countries. Volume I: Main Text
Foreword by the European Bank for Reconstruction and Development (EBRD)
by Thomas Maier
Director, Municipal and Environmental Infrastructure, European Bank for Reconstruction
and Development
and
Chris Shugart
Senior Banker, European Bank for Reconstruction and Development
Based on experience gained in lending to projects in central and eastern Europe, the Municipal and Environmental Infrastructure team of the European Bank for Reconstruction and Development (EBRD) proposed to the Danish Environmental Protection Agency (DEPA) the idea of preparing a toolkit that would gather together best-practice techniques for assessing the social and political acceptability of urban water and wastewater tariffs.
Of special importance in the regional context are the substantial increases in residential tariffs often encountered during the first few years of project implementation, which are needed for the following reasons:
 | Many years of past neglect and deterioration of assets call for a high level of catch-up investments. |
| Increasingly stringent wastewater standards lead to large investments in treatment plants. |
| Macroeconomic adjustment has led to tight budgetary constraints reducing the availability of subsidies from central and local governments. |
| Cost-reflective tariffs are being promoted to increase economic efficiency. |
| Re-balancing of tariffs is encouraged to eliminate or reduce cross-subsidies from business to residential users. |
The EBRD's particular concern in its role as a lender is with risk assessment: whether such increases will be socially and politically acceptable and how this will affect the financial feasibility of projects. The issue is highlighted when the EBRD lends to water utility companies without the benefit of either a sovereign or municipal debt guarantee - notably in the case of many concessions and BOTs. In these cases, the credit strength of the deal depends critically on whether tariff levels are sustainable.
Needed is a set of practical tools that gives a comprehensive and confident assessment of the risk of nonpayment, social dissatisfaction or political unwillingness to respect the tariff provisions in the loan agreement or concession contract - as well as the risk that the project will never even reach signing.
Willingness to pay and affordability studies yield important information for this purpose:
| Willingness to pay (i.e. for service improvement or to avoid future service deterioration) is part of the picture: if consumers consider that they are getting value for money from a tariff increase, any annoyance they may feel at having to pay higher bills should be short-lived (all other things being equal). |
| Affordability (ability to pay) is another important aspect: if, for a given tariff level for water and wastewater, consumers are not able to satisfy basic needs for all essential goods and services, there might be considerable resistance to accept a tariff increase to that level. |
But these approaches do not tell the whole story. There are other factors that enter into the final outcome: broadly speaking, they can be characterised as relating to perceived fairness and equality of treatment.
A key issue is whether consumers view a price increase as technically and financially justified - and inescapable - or whether they perceive it as being the result of factors such as the following:
| inefficiency, waste or poor planning on the part of the water company (i.e. do consumers trust their water company?); |
| gains to politicians who are viewed to be corrupt; |
| "excessive" profits being taken out by private investors. |
Another aspect is whether consumers feel discriminated against if the tariffs in many other cities in the country are lower.
Also important is the extent to which negative attitudes among the population - whether well-founded or not - are fuelled by politicians or organised interest groups. Typically, local utility prices are highly politicised, with politicians' attitudes often swinging to and fro in response to national party positions and local election strategy. Finally, resistance to tariff increases is often expressed in concrete terms through local political decisions, and so analysis that focuses directly on political acceptability is essential.
The methods contained in the toolkit broaden the scope of concern to include factors such as these. In addition, the toolkit attempts to improve on the two conventional approaches. For willingness to pay, the toolkit makes use of conjoint analysis, a type of stated preference methodology widely used in marketing and transport studies but not yet common in water and sanitation. With respect to affordability, the toolkit suggests ways to go beyond the conventional rule of thumb according to which water and wastewater expenditures are deemed affordable if they do not exceed 3-5% of disposable household income.
By putting the toolkit on the DEPA and EBRD websites and thereby making it available to a wide audience, we hope that it will serve as a resource to decision-makers and practitioners to help them in the following endeavours:
| setting appropriate performance standards (levels of service) that reflect consumer preferences, and realistic timetables for increasing these standards; |
| providing better information to city officials, banks and private investors about the sustainability of tariffs and the financial feasibility of projects; |
| encouraging the use of transparent competitive bidding procedures and public participation in the planning of concessions as a way to increase the perceived fairness of prices and hence to reduce the risk of consumer resistance; |
| providing better ways of assessing whether the criteria for grants accorded by bilateral and multilateral agencies (e.g. the EU ISPA programme) are met; |
| providing information for the design of tariff structures and, if desired, targeted subsidies; |
| helping the water company plan a customer information campaign to reduce misperceptions and create trust. |
In line with its purposes, the toolkit consists of a flexible, practical, and eclectic bag of survey and analytical techniques. The user, however, should be forewarned: there is no single magic number that emerges mechanically at the end of the process. The final step is to interpret and synthesise the results of the various surveys, and for this there is no substitute for sound social and political judgement, developed through solid experience.
Users will be the best judges of the extent to which the objectives set out for this toolkit have been achieved. We welcome all constructive feedback.