1. Privatization in a decentralized setting Case of Szeged Waterworks
Gábor Péteri

2. Initial statements to be tested
1) Private sector
goes for lucrative businesses, only
interested in short term gains
benefit a lot from the EU Funds
2) Privatization
is purely a political matter
efficiency gains cannot be realized by a municipal co.
leads to minimal municipal control
3) Contracted services
are less transparent, so accountability is lower
corruption risk is higher

3. 1.a. Bumpy road to success
Favourable conditions: Tisza, artesian water basin, pop. 170K, food processing
Loss making public bath is excluded
Stage 1., :
Szeged WaterWorks Ltd: 49% CGE shares
cash and know-how invested
“affermage”: assets remain city owned
operation and management agreement (15 years)
CGE dominated the board (3:2)
4% profit rate, management fee
City Water Investment Ltd: set prices
Water Construction Ltd (French dominated): exclusivity for contracts

4. 1.a. Bumpy road to success (2)
Stage
ex-lex status: blocking registration
new city leadership starts renegotiations
subsidiaries reorganized:
Water utility Mgmt and Development Plc.
construction capacity taken over by SzWW
renewed framework agreement years (optional)
plans for joint funding of sewage treatment plant
∑: more balanced relations after contract re- negotiations 

5. 2.a. Privatisation is politics
Stage 1. deal before the local elections (1993)
Blocking the legal registration for a term (1999)
Renegotiation with the initial leadership (2000)
Asymmetrical positions:
Lack of experiences and expertise at SzWW
Fragmented World Bank expert advice
Strategic region for French public investors
Influential international company 

6. 1.b. Long term interest Price setting: two-component tariffs
cost based formula
fixed part of WCF (33%)
Water Construction Fund
network rental agreement
rental fee ≈ depreciation
reconstruction(50%):SZWW
Development (50%): city
Water Committee decision

7. 1.c Tapping EU funds: building a sewage treatment plant
Pressure for expansion: Algyő, four villages
sewage network: +40%
HUF 32 Billion (€110M)
new assets of 16 Billion=>
high amortization costs
9 years contract extension
to lower depreciation in tariffs 

8. 2.b Efficiency gains cannot be realized by a municipal co.
Usual private company measures:
tariff increase
layoff staff
hire better paid management
Szeged Water Works:
modest price increase
technical staff was kept <=> low labour costs
but: higher salaries; international environment, stable middle management 

9. 2.c. Uncontrolled private co.
Minority owner
dominates the Board of Directors
appoints the manager
influences the Supervisory Board (through employees)
City control options:
majority owner
municipal committees on assets, finances
Water and Canal Committee decision on WCF and investments
full time urban technical dept. employee

10. 3. Transparency and corruption risks
1) Confidential, not public:
framework agreement
management contract
network rental agreement
2) Rotating top manager
3) Improved customer service
4) Diverse payment options
5) Advertisement contracts
6) Modest sponsorship (HUF 3-5M):
Open air theater, water polo, schools
In-kind: local zoo, public well, help in flood protection 

11. Case study findings 1) Private sector 2) Privatization
goes for lucrative businesses, only 
interested in short term gains
benefit a lot from the EU Funds 
2) Privatization
is purely a political matter 
efficiency gains cannot be realized by a muni. co. 
leads to minimal municipal control
3) Contracted services
are less transparent, so accountability is lower 
corruption risks are higher

12. Conclusions (for Model IV.)
Unique incentives and accountability schemes influence outputs:
Stable funding through WCF (joint interest)
Price setting: cost based and (later) capped
Benefitting from EU funds => limited expansion
Co. interest in minimizing social problems: going after arrears at low level (HUF 10K)
Balanced control mechanisms (owner, technical)
Local political interest drives decisions
Improved knowledge might change attitudes