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Water Prices in CEE and CIS Countries. Volume I: Main Text

Chapter 7
Small Town Toolkit

7.1 Introduction

For a small investment, it may not be financially feasible to use the full set of tools proposed above. In this case, it is proposed to use a limited version. The purpose of this chapter is to suggest the subset of the full toolkit which is appropriate for small investments. Therefore, this chapter refers extensively to the preceding chapters.

A simple rule as to when to use the full set of tools and when to use the Small Town Toolkit is not easily made, as it depends on the size and risk profile of the investment. However, it is suggested to use the Small Town Toolkit where the investment is less than 5 million EUR. The larger the investment, and the higher the risk associated with the expected increase in tariffs, the more important it is to use the full set of tools in order to get a better understanding of willingness to pay, affordability and political acceptability.

In particular, the following aspects should affect the choice of whether to use the Small Town Toolkit or the full set of tools:

	The scope of the envisaged tariff increase that has to be accommodated when undertaking the investment. The larger the tariff increase, the greater the need to understand the issues of willingness to pay, affordability and political acceptability in depth.
	The width of possible technical solutions and service levels. The broader the range of possible technical solutions, service levels and resulting investments, the greater the need to understand the issues of willingness to pay, affordability and political acceptability in depth.

There is room for expanding the minimum set of tools suggested in this chapter with the use of additional tools, such as "the stated preference analysis", that may be deemed appropriate for the investment project in question. The specific approach adopted must be chosen with due consideration of the factors mentioned above.

This section elaborates on the rationale and approach of the Small Town Toolkit. It proceeds to suggest when to fit the analysis proposed into the project cycle. Finally, the standard set of tools is presented which is proposed for small investments.

7.1.1 Approach of the Small Town Toolkit

The tools recommended for the Small Town Toolkit are specified in Table 7.1.

Table 7.1:
Overview of topics and tools of the Small Town Toolkit

  
The method to establish the technical, service and expenditure baseline is basically the same for small towns as that for large cities, and the technical and service characteristics must be described using the same variables. However, there are some differences that are discussed in Section 7.2.

As to customers' perception and willingness to pay, the Small Town Toolkit consists of the qualitative research, only. Important information on the consumers' attitude towards water and wastewater services is gained from conducting in-depth interviews and use focus groups.

As to the affordability analysis, it is recommended to conduct the research on aggregated data, e.g. for the region, and to take a qualitative approach to the household affordability analysis.

Finally, it is recommended to conduct the political acceptability analysis by analysing the attitudes of political parties.

The level of effort required for the analysis will depend on the characteristics of the project. To carry out the analysis suggested for the Small Town Toolkit, a total number of two specialist months and two and a half calendar months will be required, cf. Table 7.2.

Table 7.2:
Resources required for the Small Town Toolkit

Disclaimer: The resource requirement has been estimated by COWI and is not necessarily endorsed by DEPA or EBRD

7.1.2 The Small Town Toolkit in the project cycle

The suggested timing of the tools follows the full toolkit. The figure below presents an overview of each of the tasks for which tools are provided in the Small Town Toolkit and the suggested timing in the project cycle.

Look here!

Figure 7.1:
Overview of Small Town Toolkit task and their timing in the project cycle

Legend
Prefeasibility/Feasibility

In Figure 7.1 we have assumed that, for "small towns", the pre-feasibility and feasibility stages are carried out jointly following project identification. If this is not the case, the overview of timing shown in Figure 2.3 applies. Furthermore, as a result of the longer calendar time spent when the prefeasibility and feasibility stages are carried out separately, the resource use for the Small Town Toolkit, in this case, is likely to be in the higher end of the interval given in Table 7.2.

7.2 Technical, service and expenditure baseline

The technical and service characteristics must be described using the same variables as described in the technical profile summary in Appendix 3. However, the assessments of appropriate service level and acceptable future expenditure differ in small towns compared to large towns.

In many small towns in the CEE, the target formulation for the project is often coming from the "outside of the town"; either as part of a national development programme or as part of a programme to meet an international obligation. In particular in the EU candidate countries, the objective of the project is often coming from the need to adhere to the EU environmental acquis.

National policies in the water and wastewater sector in several countries (e.g. Hungary and Lithuania) seem to set a high level of ambition in terms of service targets for small towns partly with reference to EU accession. Preparation of projects with substantial foreign contributions (e.g. ISPA grants) is typically done for "batches" of small towns in order to achieve economies of scale in project preparation and meet minimum donor requirements for project cost. However, this method of preparation has a tendency to lead to standardised approaches with a considerable element of foreign technology in the solutions. Therefore, for small towns we recommend a particular focus on the choice of service level and appropriate technologies.

The technical analysis should:

	Assess current service level, condition and operations.
	Specify targets for future service.
	Assess expenditure needs of alternative future service levels.

These issues are described briefly below and further elaborated in Chapter 3.

7.2.1 Assess current service level, condition and operations

The technical and service characteristics can be described by the variables in the technical profile summary, cf. Appendix 3, and these data should be collected. The data sources are existing reports where available, supplemented with data collected from the water utilities through a simple questionnaire and discussions.

The current water and wastewater system, its condition and the overall service level, should be described based on a collection and assessment of the data, supplemented with discussions and selected sample visits to a limited number of facilities.

7.2.2 Specify targets for future service

Based on the assessment of the current situation, realistic scenarios for future service levels should be made, including a without the project and a with the project scenario.

When specifying the targets for future services, it is particularly important, in small towns, that the following issues be thoroughly considered:

	What are the perceived water and wastewater service problems as seen by the customer?
	What are the objectives of the main sponsor, e.g. national government, foreign donor?
	Do the proposed service target and the technical solution reflect the objectives of both the customer and the main sponsor in a cost-effective way?

This is to ensure that the selected target services fulfil both the preferences of the customers and the demands coming from outside of the town.

Text Box 40:
Appropriate technology in Kivioli, Estonia

  
7.2.3 Assessment of expenditure needs of alternative future service levels

The necessary tariff revenue depends on the expenditure needs. The assessment of expenditure needs is as difficult for small towns as it is for large cities. If data is unavailable, the estimates have to be based on engineering judgement. There are two cost components of the expenditure needs, resulting from:

	Operation and maintenance; and
	Investments and their funding.

It can be assumed that the tariff revenue should finance the annual expenditure need. The annual expenditure need can be estimated as the sum of the annual operation and maintenance expenditure and the annualised investment costs.

Hence, in order to be able to calculate the expenditure need and the tariff increase, the operation and maintenance cost and the cost of investments should be estimated.

Operation and maintenance

The implications of the investment for future operation and maintenance expenditures, and whether the expenditures can be recovered through user charges should be determined.

In the CEE, the expenditure need arising from daily operations can typically be assessed based on information given in the accounts.

In the CIS, it may be difficult to obtain good estimates of the proper expenditure need arising from daily operations. If the maintenance expenditure need has to be estimated on the basis of engineering judgement, the estimate may be supported by information from other studies, cf. Chapter 3.

Investments and their funding

The sources of data for the required costing of investments include existing project reports, where available, existing investment plans provided by the service provider, etc.

In most cases, the municipality or the service provider will have investment plans for the required rehabilitation and expansion. It is, however, important to assess such plans carefully in relation to the target.

In cases where no reliable investment plans are available, the technical team will have to assess investment levels based on sound engineering practice, taking the technical profile summary as the entry point. Rough rules of thumb and reference to generic cost functions will do, at this stage.

As part of the work, it should be considered whether the small town will be able to finance file replacement of infrastructure when it is worn out.

7.3 Customer perceptions, willingness to pay and demand for water services

Due to small size of the projects, it is normally not financially efficient to carry out willingness to pay assessment through a stated preference survey. Still, it is important to solicit the customers' view on the baseline service level, their perception of problems and their attitude toward future service change options. The key issue for small towns is to match customer perceptions of service level, environmental and health issues with regulatory requirements - typically searching for a minimum cost solution.

Text Box 41:
Tap water in Viljandi, Estonia

  
In small towns, the qualitative part of the methodology outlined in Sections 4.4 and 4.5 can be used for the assessment of customer perception of service level issues. The work includes:

	The determinants of willingness to pay.
	Qualitative analysis of the willingness to pay.

The tasks are discussed briefly below and elaborated further in Chapter 4 above.

7.3.1 The determinants of willingness to pay

The main determinants of willingness to pay are the perceived quality of water and wastewater services, household income and the current price of water and wastewater services.

In addition, the willingness to pay is influenced by a number of factors, such as the history of price and service levels, affordability, the effectiveness of public relations, public awareness of environment and public health issues, cf. Chapter 4. These are issues that might be considered when analysing the willingness to pay. The relative importance of these issues may be assessed by:

	Undertaking qualitative background research
	Meeting the relevant people

The relevant issues can be determined by undertaking background research in order to understand the realistic technical options, billing and payment collection, as well as the socio-economic context.

It is recommended to interface with financing and engineering experts of the service provider in question (or consultants) in order to understand the constraints (and possibilities) faced by the service provider. Access to policy makers (or a socio-economic expert) may provide an understanding of the socio-economic context in which the service provider works.

7.3.2 Qualitative approach to willingness to pay analysis

Important information on the consumers' attitude towards water and wastewater services is gained from conducting in-depth interviews and using focus groups.

The qualitative research comprises structured interviews or discussions with a sample of users in order to determine the important factors as perceived by the users and their willingness to pay the proposed services. The size of the sample for qualitative research is small, say approximately 10 - 20 people. The sample for qualitative research should cover representatives of the major seg-ments of the users as well as different geographical areas within the area of service provision.

The qualitative research can be conducted as in-depth interviews or focus group discussions. Indepth interviews are face-to-face and conducted with respondents in a suitable, comfortable environment. A programme of 6-12 interviews is required. A focus group consists of a group of typically eight respondents. One focus group is often sufficient, and the discussion can last approximately 2 hours.

The focus group can be moderated either by a member of the market research team, if necessary with consecutive translation of questions and simultaneous translation of responses, or by a local expert with the market research team watching and following the discussion through translation of questions and answers, cf. Chapter 4.

Text Box 42:
Willingness to pay in Kaliningrad

   
For both in-depth interviews and focus group discussions, a financial incentive for the participation should be provided (equivalent to approximately two hours' wage income or 2-15 EUR).

Both the in-depth interviews and the focus groups use a topic guide. The content of the topic guide will depend on the local circumstances as elicited from the terms of reference and discussion with relevant people, cf. chapter 4. A generic example of a topic guide is included in Appendix 4.

Following the in-depth interviews or focus group discussions, the consultancy team will meet to discuss the findings. This process involves going through the written notes from all the interviews and focus group discussions, topic by topic to assess the importance of each topic area and the willingness to pay for improvements.

7.4 Household affordability

The affordability analysis can be carried out in the same way as for larger towns if town specific income and expenditure data can be retrieved from statistical data. Regional statistical surveys may provide a good starting point for an assessment of income and expenditure levels in small towns in the region. If reliable data cannot be obtained, it may be helpful to conduct a simple expenditure survey.

Three approaches are suggested for small towns:

	Analysis using macro data.
	Analysis using household survey data.
	Qualitative assessment.

The qualitative assessment is called for if no data is available or as a supplement to data of low quality. These three approaches are described briefly below, and the analysis of macro data and household expenditure data is further elaborated in Chapter 5.

7.4.1 Analysis using macro data

Analysing macro data can be conducted at a relatively low cost if the data is readily available, cf. Section 5.3. For small towns, data may not be available for the specific town but only for the region, and there may be differences in income levels within the region. Thus, when such data is available, the consultant should carefully consider whether the sample used is representative of the small town in question.

In order to conduct the analysis, the following data is useful:

	Cost of water.
	Income data.
	Expenditure data.

It is useful to establish an average measure of the cost of water, such as the typical cost of water services as a percentage of average income. This measure should be supplemented with measures that take income distribution explicitly into account. If income distribution data is available, and water expenditure is known by income group, the share of income used for water services can be estimated for each income group.

7.4.2 Analysis using household survey data

Household survey data may be available from previous reports, and such data may be useful even when the aim of the previous work differs from that of the present analysis.

An alternative to depending on existing data, is to carry out an expenditure survey. For one small town, this is likely to entail excessive use of resources. However, if a project is designed to cover a large number of small towns, say 10-15, carrying out an expenditure survey may be a possible approach. In this case, the survey should be designed to deal with any major biases between towns, for example by pooling towns according to size, geographical location, employment structure or other a priori determined variables relevant for stratification.

If data on household expenditures is available or an expenditure survey has been conducted for the purpose, it is possible to obtain better insight in the households' economic situation, cf. Section 5.5. Two useful measures are water expenditure as a percentage of household income and the share of household income that is used for food. With detailed data on household income and household expenditure on water and wastewater services, it is possible to analyse the distribution of water costs across households.

Finally, the composition of expenditure provides important information on affordability. If the average spending on food approximates 70%, there is likely to be a problem of affordability²⁴. Expenditure data can also reveal if there are changes in the distribution of the expenditure over time, e.g. an increasing share may be allocated to necessity goods such as food, heat, water, gas and electricity.

Text Box 43:
Cost of cold water and sewage in Ukmerge, Lithuania

7.4.3 Qualitative assessment

If no data is available, an affordability assessment may be based on structured interviews with staff of the local administration dealing with social assistance programme.

Qualitative interviews with a limited number of customers can also provide useful information. In addition, a trained economist with knowledge of the economy in question may be able to assess the level of income based on a structured assessment of the type of transport equipment in use, the clothing of the population and the selection of products in the shops. However, both methods should only be used if no other opportunities are available and the results should be interpreted with caution.

Text Box 44:
Affordability in Borovichi

Source: Based on a feasibility study by Carl Bro Management (2001)

7.5 Political acceptability

7.5.1 Attitudes of political parties

In small towns, it is suggested to carry out the attitude analysis by interviewing political party representatives. This analysis is relatively cheap to conduct, and the approach can give a good understanding as to whether water services and tariffs have emerged as a political issue.

The analysis proposed for small towns corresponds to level 1 described in Chapter 6. This includes

	Involvement of local expertise.
	Interviews with the relevant political parties.
	Compilation of complementary information.
	Assessment of the political acceptability.

The four points are briefly described below and further elaborated in Section 6.7.

7.5.2 Involvement of local expertise

When preparing the interviews, a local assistant should compile background materials. This includes party programmes and statements, election programmes etc. in which the parties may present principal points of view on, for example, environmental matters, the application of the full costrecovery principle in the provision of services, social concerns, etc.

7.5.3 Interviews with the relevant political parties

The relevant political parties should be identified. A prominent representative of each political party should be approached. The representative should be able and willing to describe the party's official stance and policy in detail. The interview should clarify whether or not the issues have been thoroughly debated within party circles. If the party has relevant written declarations, for example covering the water tariff issue, a copy should be secured.

The interview should detect the principal line of reasoning. On what general principles does the party base its standpoint on water pricing? Purely pragmatic? A trust in the market mechanism? Social concerns? Perception of the borderlines between public and private obligations in the provision of municipal services? etc.

It is recommended to prepare and apply a semi-structured interview guide.

7.5.4 Compilation of additional information

After a round of interviews with the political parties and before drawing any conclusions, it will be relevant to confront a local social scientist with the results so as to get a better contextual understanding of the information collected.

7.5.5 Assessment of political acceptability

The assessment must be based on the background factors and the information obtained through interviews. The consultant should seek to interpret the findings in the light of the background factors. It is important to distinguish between ruling parties and parties in opposition and to assess how a change in municipal government may influence the level of acceptability.

When assessing political acceptability based on the relatively quick screening of attitudes, it is recommended to be careful not to draw far-reaching conclusions.

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