JURIJS SPIRIDONOVS DR.OEC. DEPUTY STATE SECRETARY OF THE MINISTRY OF ECONOMICS’ OF LATVIA Economic growth in the water sector of Latvia, impact of EU financing May 22, 2014

Matter of the research 2 EU funding for programming period in Latvia, exceeds 4.5 billion euro; a significant investment had been made ​​ in improving water management system. Nevertheless, water management subsector in Latvia has not been extensively studied, due to the fact that by adopting the need to implement standards specified in EU legislation, the need to ascertain investment efficiency has remained in the background.

Why EU funds? 3 This programming period is the sequel to the previous programming period and scientific evaluation of the results varies substantially from “not very effective (de la Fuente, 2003)” and “failed to achieve a satisfactory growth rate (Sapir et al., 2004)” to “potential long-term positive effect” (Varga, in't Veld, 2009). Some researchers indicate that there is no evidence that the existing policy is the most appropriate (Boldrin, Canova, 2001) and the Cohesion Fund should be terminated (Boldrin, Canova, 2003).

Role of the government 4 The issue of economic development is one of the most extensively described in the scientific literature, it includes a number of interrelated issues, the most important of these is an attempt to find the factors to ensure national economic development: economic growth, reaching objectives of social and sustainable development. Necessity for the government to execute certain economic policy is determined by the need to characterize the changes in the economic processes, establish the appropriate mechanisms for completing these changes, and identify the necessary resources for implementing selected governmental economic policy.

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Value of the resource 6 One of the most important natural resource is water; according to the World Health Organization, 1.6 mln. deaths worldwide are due to diseases caused by insufficient water quality or lack of water (Bartram et al, 2005). Water is essential not only for individual consumption; it also supplies almost all sectors of the economy - from producing energy to agriculture.

Bussiness or? 7 Water management sector revenue assessment in 2011 indicates the amount of income of 500 billion USD worldwide and 130 billion USD in the U.S. (Maxwell, 2011).

Description of the water management subsector in Latvia (2010), in comparison with entire industrial sector (% of industry) 8 The number of enterprises Turnover ratio Production value The added value Number of employees Water collection, treatment and supply 0.59%0.67%0.84%1.72%1.40% Wastewater collection and treatment 0.67%0.40%0.52%1.14%

9 The average payment for water management services (drinking water, wastewater treatment) as a percentage of household expenses; the Cohesion fund

10 The average payment for water management services (drinking water, wastewater treatment) as a percentage of household expenses; the ERDF

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Findings of the practical research 12 majority of municipalities have been informed or are aware about the common features of the EU directive requirements, and municipalities have similar plans for additional funding for project implementation untill the assessing the effectiveness of EU co-funded projects, municipalities with implemented EU co-funded projects, mostly considers them to be an effective solution; assessing the possibilities to manage without EU funding after the 2015, majority of municipalities, with and without implemented EU co-funded projects, considers that only system maintenance will be necessary. On the other hand, a significant part of the municipalities considers that it will be impossible to do without the EU funding;

Findings of the practical research 13 there is no significant difference in the assessment of tariff, for the municipalities with or without implemented EU co-funded projects. Moreover, in both cases, about 50% of municipalities assesses tariffs as to be at normal level; comparing of the subjective opinion of respondents on the changes of service quality for the past five years with the water compliance norms, it is impossible to draw a valid conclusions. For example, the ammonium concentration is below normal in almost all of the municipalities with EU co-funded projects that evaluated the quality of as constant or deteriorated (263 municipalities out of 350). On the other hand, municipalities without the EU co-funded projects (160 out of 327) with ammonium concentration below normal, considers that water quality has deteriorated or remained the same.

Findings of the practical research 14 it could have been estimated that in municipalities with the implemented EU co-funded projects respondents rated tariffs as higher. However, the actual situation is contrary. It means that tariffs in municipalities without the implemented EU co-funded projects are higher, although these differences are small and statistically insignificant. Tariff increase rates are slightly more rapid in municipalities without the implemented EU co-funded projects.

15 Practical results: an example EU projects have been implemented EU projects have not been implemented Prices are very low 104,10%259,58% Prices are low 6727,46%9737,16% Prices are at normal level 12752,05%11945,59% Prices are moderately high 2610,66%197,28% Prices are high 72,87%00,00% No answer 72,87%10,38% total:

16 Comparison of quality of the water services and the tariffs Drinking water: EU projects have been implemented EU projects have not been implemented Quality is relevant18977%17467% Quality is not relevant4820%8432% No answer73%21% total: Sewerage: EU projects have been implemented EU projects have not been implemented Quality is relevant19078%16363% Quality is not relevant4820%9035% No answer62%5 total:

Future 17 In Latvia water management subsector development primary will be determined by the population change and the development processes of the industry. Both factors, in case of adverse effects (depopulation, reduced amounts of industrial production), will have a highly negative impact on the further development of the water management subsector and individual water management systems. In some cases, this may lead to the following situations: Competition will develop between the water management systems, which technically can service an equal range of service users.

Future 18 Prices for services will increase, even in the case when one water management service system operator provides a service to other water management system operator (e.g. waste water treatment plant is located in one agglomeration, but from the other agglomeration waste water is delivered through the pressure piping). This way it will attempt to increase the financial efficiency of the system operation. With increasing criticism regarding the operational efficiency, the issue of affiliation will also intensify. It should be noted, that in several EU countries, water management subsector is serviced only by the private operators, not by the ones owned by the municipalities, this could potentially influence the discussion on asset ownership in Latvia.

Future 19 FactorGloballyIn Latvia Solvency of the water management service user There are still two divergent views in the global debate on water management service pricing: - water is a commodity; - availability of water is a human rights issue. In both cases, there is no reason to assume that the solvency of the inhabitants is increasing if they are provided by the water management services. This issue in has not been widely examined, although in principle it can significantly change the development trends of the water management subsector; in the past decade, there has been a significant investment in the subsector, constituting of more than 1 billion Euro, but only part of the depreciation of fixed assets is included in water management service tariff. There is already information available on the municipalities where the tariff level reaches or exceeds a critical limit (see above), meaning that the further development of the water management systems has to be limited, regardless of the available funding for investments (except when the additional investments reduce costs of the production per one production unit).

Future 20 FactorGloballyIn Latvia Investment opportunities Given that globally a significant number of people still have no access to the water management services, investment flow in the subsector will be continuously high. At the same time in less developed countries, such projects will still be funded by international organizations: it enables to address the cross- border environmental problems as well as to provide support for national companies in procurement implementation. According to the approved National Development Plan of Latvia 2014 – 2020 funding is intended for the development of water management subsector. The amount is about five times lower compared to the previous period. The pressing issue is the project implementer ability to ensure co- funding to the EU funded projects, but this problem should also be considered in the context of their solvency.

Way forward 21  EU funding can be available only in the case if in the municipal area there is only one water management service provider under municipal management (or only one private service provider). It is acceptable for another municipality’s service provider to operate in other municipal territories.  project application must have a detailed plan for ensuring access to the centralized water management service system. The plan must be verifiable and tested before allocating the grant from EU funds;  projects, that do not anticipate full compliance with EU environmental standards, must not be eligible, which is reasonable, given the limited amount of funding;

Way forward 22  projects, that focus on waste water management objective, must be eligible, given the fact that water management services generally are complex, drinking water component has to be included in the project, but its financing must be done by the project applicant;  to ensure an improvement of detailed criteria for long-term investment plan analysis, including risk prevention measures in case of commencement or termination of industrial enterprises.

Way forward 23 Statistical information on the water management subsector does not include a number of components that should be amended in the future:  information is required about water management service tariffs for each populated area, regardless of the legal status of water management service providers;  information on water management subsector must include data for all water management service providers, regardless of their legal status.

Way forward 24 For the development of water management subsector, there has to be acknowledged policy planning document at governmental level, determining government policy objectives in this subsector:  water management service accessibility indicator; determining it individually for agglomeration and the country in total;  water management service consumption index ; determining it individually for agglomeration and the country in total, thus ensuring a positive impact on the economic use of natural resources.

25 Thank you very much for your attention!