TARIFFS FOR CLEAN WATER EU funded project “Cross border water resource management” Regional Workshop IMPROVING WATER SUPPLY CONDITIONS AT LOCAL LEVEL TARIFFS FOR CLEAN WATER Jovanka Ignjatović, Senior project manager REC April 1 - 3, 2014, Struga, Makedonija

TARIFFS Why do we need tariffs? Who pays tariff ? Who does not pay? To which extend collected tariffs cover operation and maintenance costs?

Key messages! TARIFFS – key role is to provide financial resources for OPERATION AND MAINTENANCE of the service In a long term – Tariffs to include cost recovery and costs of upgrade of the system, new investments Protection of aquatic ecosystems NO DONOR will finance operation and maintenance costs of infrastructure! NO DONOR will give money for new infrastructure if operation & maintenance costs are not or won’t be covered!

Common problems with tariff rate in SEE Political influence on the rate Lack of regulatory body Lack of methodology for tariff design Lack of process of tariff increase

Objectives of tariffs reform GETTING THE UTILITY INTO GOOD FINANCIAL ORDER IS THE FIRST PRIORITY!!!!!! Financial stabilisation body Sustainable operation Upgraded service

Financial stabilisation (i)* Determining the current conditions of the utility: Re-create the utility operating accounts, Examine and re-consider the revenue stream and cost categories; Evaluate current conditions; does the current revenue stream cover short term costs? Observations in SEE Many utilities have weak, short run balance sheets Funds for system depreciation are often used to offset problems with collection, revenue shortfalls, emergency repairs and other operating expenses

Financial stabilisation (ii)* Mismatch between record keeping and system of financial planning Tariffs are not usually based on the cost – of – service We would like to be sure that tariff rate does not include costs of bad management of the utility (*Case study of municipal waste water utilities)

Sustainable operation* Tariffs reforms providing long term support for current service levels. We need a programme that: Identifies tariff levels and structure that can support sustainable operation at current service level Supports investments that will generate longer term cost savings Supports structural and operational reforms that can enhance; system planning, revenue streams, cost controls,.

Observations Very difficult for SEE utilities to achieve sustainable operation; Often, lack of the data, experience and tools to identify, evaluate and implement reforms on their own. Difficulties in obtaining budget for design and implementation of programmes of changes (*Case study of municipal waste water utilities)

Upgraded service (i)* Tariff reforms supporting upgrades in the service Determining a programme of upgrades: Upgrades of service include: Reliability of water service Improvements in drinking water quality Extensions in water service Improvements in wastewater treatment

Upgraded service (ii)* Setting investment programmes Identifying tariffs levels and structures that would support those investments Identifying the customer burden associated with programme implementation (*Case study of municipal waste water utilities)

HOW TO DESIGN A PROCESS THAT CAN INCREASE RATES OF TARIFFS? PROCESS OF REFORM! HOW TO DESIGN A PROCESS THAT CAN INCREASE RATES OF TARIFFS? Do we need increase of revenues? – financial analyses of the utility If the utility is in a bad financial situation – is it result of bad management or need for revenue raise? Importance of process of benchmarking – what is financial situation of other companies in the country?

Questions? Who has the authority to set/change tariffs? How frequently the rates should be revised? How transparent is the process? What are the roles and responsibilities of the stakeholders?

Stakeholders in the process Stakeholders in the process Role Statement Interest Action IFIs Providing capital investment “We want our money back” To ensure cost-recovery To increase tariffs Municipality Compliance with the EU legislation “We are providing better conditions of life” To win next elections. To control tariffs setting. To decrease tariffs Utility To provide adequate services “We provide high quality service” To have the highest profit as possible To have liberal market for tariffs setting Regulatory body To ensure that tariff rates are set on appropriate level “We are taking into consideration all aspects” Fairness of tariffs (profit/expansion/coverage of service) - neutral Customers To use the service “We expect high quality of service” To pay as little as possible To oppose the increase of tariffs. To use less of service. IFIs International Financial Institiutions

Questions municipality should ask (i) Has utility/PIU done everything to be efficient? Maybe by improving efficiency the tariff rate will be lower? Has utility/PIU conducted benchmarking to compare tariffs from other regions? Has utility/PIU analysed the system/process of tariff setting? Has utility/PIU prepared the strategy for public participation/public hearings for tariffs increase? utility/PIU Pre-Installation Utility

Questions municipality should ask (ii) How consumers of the utility will be informed about the increase of tariff? (ensuring quality of service) Is there a strategy for demand side management? (utility to inform customers about ways to reduce their consumption of services = lower rate of tariff!) (to avoid over-sizing) Is there a strategy/plan how to involve customers into the utility operations? (“open-doors” = making customers responsible).

Affordability (i) Determined by the income of household, the level of consumption, tariff policy, subsidy scheme and the level of payment collection. There are two most common ways to estimate the affordability; it can be defined as; The share of monthly household income that is spent on the utility services. The share of utility payments in total household expenditures

Affordability (ii) Estimations based on households expenditures – more accurate – as they capture all sources of income. If this share (ratio) rises above the certain threshold, affordability is considered as problematic.

Affordability (iii) It must be taken into account that there are several limitations in relation to the current affordability analysis. Affordability estimates are affected by the degree of non-payment. It is the case that households are reporting low expenditures on utility services, because they do not pay the bills; The estimates reflect still low levels of tariffs charged. Therefore the estimates do not show the scale of the problem, as the tariffs must be increased in all of the SEE countries as a result of cost-recovery approach.

Stakeholders in the process Affordability of utility services, average household (in % of total household expenditure) in 2003* Electricity Heating Water CEE 3.8 3.7 1.6 Average SEE 4.86 1.14 1.02 Albania 4.2 0.8 BiH 5.4 0.6 1.1 Croatia 3.9 0.4 1.3 Macedonia 5.3 0.1 1.2 Serbia and Montenegro 5.5 4.6 0.7 (* WB for Reconstruction and Development, Samuel Fankhauser and Sladjana Tepic, Prepared in May 2005) Stakeholders in the process

Assessing level of affordability Comparison to benchmarks: Acceptable level of expenditures for utility bills – 25% of households expenditures on electricity, district heating and water

Level of affordability chart

Affordability and poorest population Affordability is usually a problem for the poorest part of the population Additionally usually they do not pay the bills Household expenditures of the poorest 10% of the population of the project should be taken into account

Mitigating the social effects of cost-recovery BLOCK TARIFFS: services up to a certain threshold are provided at a low cost or no cost. Consumption above this point is charged at full cost. It enables all consumers to have access to the service, and it stimulates savings of service usage. Nevertheless, this system requires a well developed metering system, what is not always the case in the SEE countries

Assistance programmes programmes are developed to transfer cash to vulnerable groups of society (e.g. pensioners, social benefits people), to cover the minimum level of consumption. This system requires a good identification of vulnerable members of the society, which might be problematic. These programmes also depend on funding sources available and fiscal expenditure management

Conclusions Tariffs increase is necessary but before the rates are increased it is important to: Achieve financial stability Sustainable operation Design process of tariffs increase Do everything that the resources are not wasted Conduct public relations campaign (good information), Design affordability analyses and identify likely affected group.

THANK YOU FOR YOUR ATTENTION!