Development of National Water Tariff Study Presentation by Giel Verbeeck REC IPA Conference 2 April 2014

Synopsis Project Name: Development of National Water Tariff Study Reference No: Europe Aid/130917/D/SER/MK Contracting Authority: Central Financing and Contracting Department, Ministry of Finance (CFCD) Beneficiary: Ministry of Environment and Physical Planning (MoEPP) Consultant: EPTISA - GEING 02 April 2014

Technical Meeting 3 - Economic Instruments Project rationale Environment EU approximation in the area of water and environment Economics Financial sustainability of the water sector at an affordable price Allocation of resources Commitments considering waste water treatment connectivity 24/11/2018 Technical Meeting 3 - Economic Instruments

Technical Meeting 3 - Economic Instruments Project objectives Analysis of the existing situation with respect to infrastructure, legal, financial and social aspects Developed tariff methodology to be implemented, likely, under a new tariff system Developed economic instrument for cost recovery and action plan for its implementation -> Based on: Coordination with stakeholders Collaboration with pilot utilities (Skopje, Kumanovo, Prilep) 24/11/2018 Technical Meeting 3 - Economic Instruments

Technical Meeting 3 - Economic Instruments Activities Preparation and Implementation of Stakeholders’ Involvement Plan Analysis and Assessment of the Existing Situation at National Level and Local Level in Water Sector Related to Water Supply, Collection and Treatment Development of an Economic Instrument for Effective and Affordable Cost Recovery in the Water Sector Related to Supply, Collection and Treatment Formulation of the Water Tariff Methodology and Structure of the Water Tariff Development of Action Plan for Implementation of the Economic Instrument 24/11/2018 Technical Meeting 3 - Economic Instruments

Technical Meeting 3 - Economic Instruments Service Providers Regions in RM Number of municipalities Number of Public Service Providers Water supply and waste water service providers Water supply service providers Waste water service providers East 11 10 1   North east 6 4 Pelagonija 9 5 2 Polog Skopje 17 South east South west 7 Vardar TOTAL 80 50 14 3 24/11/2018 Technical Meeting 3 - Economic Instruments

Technical Meeting 3 - Economic Instruments Sector performance Indicator 2008 2009 2010 2011 2012 1.1 Water Coverage (%) 91 2.1 Sewerage Coverage (%) 75 74 72 73 4.1 Total Water Consumption (l/person/day) 181 172 157 155 158 4.7 Residential Consumption (l/person/day) 133 125 120 119 115 6.1 Non Revenue Water (%) 62 61 64 63 6.2 Non Revenue Water (m3/km/day) 116 94 96 89 103 8.1 % Sold that is Metered (%) 24/11/2018 Technical Meeting 3 - Economic Instruments

Typical project profiles Although each utility and municipality is different, for the purpose of this project a distinction into three profiles is made: profile 1 consists of the utility providing water services to the municipalities forming the city of Skopje Profile 2 consists of the remaining utilities that serve a population of at least 25,000: around 17 utilities operating in 18 medium sized municipalities. The average population served is 58,000. most of the utilities belonging to this profile have received some form of technical assistance in the past. Profile 3 consists of remaining 42 utilities that serve communities of less than 25,000 population (on average 10,000). The size of these utilities is typically small and multipurpose utilities. They are unlikely to comply with any more advanced tariff methodology aiming at cost recovery.

UWWTD Investment Needs €500 - €670 million (COWI, 2010) €293 per inhabitant (taking average and all population) Average Case: ~50% of wastewater treatment is tertiary nutrient removal in sensitive areas Agglomerations Collection Treatment Total Proportion 2,000-10,000 68,760,864 28,581,850 97,342,714 17% 10,000 – 100,000 194,376,435 150,972,307 345,348,742 59% >100,000 62,790,240 82,209,939 145,000,179 25% 325,926,539 261,764,096 587,690,635 55% 45% Again you are familiar with this, so I will not spend much time on it, but I just wanted to recall hat the 2010 estimates prepared by COWI indicate an investment need to between 500 and 600 million, which equates to about 290 euros per person. The table shows the average of the cost estimates made by COWI Moreover you can also see that the bulk of the costs fall on the medium and larger agglomerations And that the investment costs for collection are (depending on which treatment scenario you take) similar to those for treatment This reflects the fact that collection networks are very expensive to build, but that there are already a large number in place OK – this is a lot of money, but it is comparable with the expenditure of other Candidate – Accession Countries 24/11/2018 Technical Meeting 3 - Economic Instruments

UWWTD Investment Costs Member State Population Investment million Proportion of Total € per capita Bulgaria 7,563,710 €2,135 6.10% €282 Cyprus 819,140 €630 1.80% €769 Czech Republic 10,506,813 €2,975 8.50% €283 Estonia 1,340,127 €245 0.70% €183 Hungary 10,014,324 €3,885 11.10% €388 Lithuania 3,329,039 €525 1.50% €158 Latvia 2,248,374 €840 2.40% €374 Malta 414,372 €140 0.40% €338 Poland 38,167,329 €11,165 31.90% €293 Romania 21,462,186 €10,080 28.80% €470 Slovenia 2,046,976 €805 2.30% €393 Slovakia 5,424,925 €1,610 4.60% €297   103,337,315 €35,035 €339 What did implementation of the UWWTD cost in other recent accession countries There’s a summary here from the European Commission – bottom line – about 340 euros per head 24/11/2018 Technical Meeting 3 - Economic Instruments

Key implications of assessment Large investment need (>€500m), mainly waste water collection and treatment Financing strategy required to cover annual amounts of € 25m - € 35m Sustainability through new tariff system: Providing incentives to be cost and resource efficient Respecting affordability and willingness to pay 24/11/2018 Technical Meeting 3 - Economic Instruments

Elements of Economic Instrument Applicable economic instruments that have been tried and tested in EU member states: Tariffs Taxes and Charges Subsidies Voluntary Agreements 24/11/2018 Technical Meeting 3 - Economic Instruments

Technical Meeting 3 - Economic Instruments Tariffs Tariffs are an integrated part of EI package New methodology to address: Harmonisation (user/polluter pays principle) Affordability and vulnerable groups Incentives to reduce Non Revenue Water, improve efficient use of resources, asset management, investment and development Business planning for multiple years ahead 24/11/2018 Technical Meeting 3 - Economic Instruments

Supplementary elements of EI Tariffs alone cannot address the financial and environmental challenges. A redesigned water abstraction charge may provide strong incentives to reduce Non Revenue Water in the entire water sector A redesigned water pollution charge may provide the required co-financing needs Voluntary agreements can support the development of an improved sector structure. 24/11/2018 Technical Meeting 3 - Economic Instruments

Assessing funding sources

Cost recovery economic instruments for the Macedonian water sector Taxes V.A.T. (reduced 5% rate) maximum % of household income, max % annual increase Affordability and acceptability Interest cost to go down again Eligible cost based on benchmarks Depreciation to increase Tariffs Finance for investment Collection rate to go up Costs of Capital Replacement and renewal Depreciation O&M stable relative to scale/scope of service Providing for a transition period Bad Debt Expense Operation and Maintenance Agreed targets for efficiency ratios 3-5 year projection period for tariff calculation Co-funding Waste Water Treatment Plants Charges Abstraction Charge MKD/m3 Improve efficiency & generate funds Regulatory focus on efficient O&M Pollution Charge MKD /m3

Process Alternative concepts for development of Economic Instrument Comprehensive centralised reform Minimum change Compromise approach Identification of applicable instruments for RM Tariffs Abstraction charge Pollution charge Voluntary agreement Identification of economic instruments Possibillities Constraints Policy framework EU accession River Basin Management

Conclusion and further steps There is good scope for implementation of EI package to ensure water sector sustainability i.e. investment, finance, resource efficiency, optimised performance and EU compliance. Affordability is built into design of EI package. After optimal concept is identified the EI package is to be specified and then tested with three pilot water utilities of Skopje, Prilep and Kumano National workshop foreseen to further build consensus on existing situation and the way forward.

Thank you very much for your attention БЛАГОДАРАМ! Giel VERBEECK E-mail: watertariff@eptisa.com www.eptisasee.com A Project is implemented by EPTISA and its consortium partner GEING Orce Nikolov 74, 1000 Skopje Tel : +389 (0) 2 311 99 07, Fax : +389 (0) 2 311 99 07 e-mail: watertariff@eptisa.com This Project is funded by the European Union