Concession this: Water and Sewerage and the benefits of private provision of public water

I dedicate this article to my friend Vladimir Karolev,

With whom we have repeatedly discussed water concessions,

district heating, resorts, beaches and services. [i]

After St. George's Day, state television spread the news that the water and sanitation companies were planning to raise the price of water. As the drafter and importer of the modern (since 1991) environmental protection law and one of the advocates for environmental protection in a market-based and generally beneficial way, I decided to follow what was happening and try to share what could be done.

Water prices: a stalemate

The reasons for this plan, as cited by BNT, are: inflation in general, but especially the prices of electricity, materials and maintenance components, and perhaps labor.

Nothing is said about the cost of labor and the historical dynamics of Vic prices.

I will begin the description of the current situation with labor prices in the Water and Sewerage sector, then I will describe the situation going back from today to the past, and then I will return to water prices.

Some financial statements of water and sanitation companies for 2019 (the latest now available) show that personnel costs are decreasing compared to the previous year. But by the end of 2021, the total employer labor costs in the industry for the period after 2016 had increased by 157.1%. The increase for last year alone is 20%. But this is for the entire industry, which includes, in addition to water supply, sewage services, waste management and environmental restoration.

Most water and sewerage companies are state-owned, it is probably a good idea to compare the salaries of those working in them with those in the State (and municipal) government sector, because this is the alternative career for employees from these companies. In the state administration, the average annual increase in 2021 alone is 25-30%, and compared to 2016 – 193.6%.

Interestingly, for water and sanitation operators, the information is quite scattered and requires a deliberate effort to collect and summarize it.

We are talking about 43 "water supply and sewerage operators", according to the most current list of KEVR of those of them "who haveor should have(emphasis mine – K.S.) approved business plan for the current regulatory period 2017-2021.”

In early 2020, the Minister of Environment and Water, Emil Dimitrov, who took office following the water shortage crisis in Pernik, gave the following picture of the state of the sector. [ii]

• 29 water and sewerage companies are operating illegally and should be handed over to the prosecutor's office;
• Of the 7,400 drinking water pumping facilities, 960 operate without a permit, which is against the law and has been a problem for 40-50 years;
• About 3/5 of the companies do not have sanitary protection zones (which means that waters can be deliberately polluted or poisoned);
• More than half of the water is wasted, not reaching the end user (more details about losses below);
• More than half of these companies are facing bankruptcy;
• If the law is implemented, more than half of the country will be left without water.

A little earlier, in early December 2019, Mr. Dimitrov's colleague at the Ministry of Regional Development and Public Works, Ms. Petya Avramova, estimated the funds needed to modernize the country's water and sanitation infrastructure at 11 billion leva, or approximately 11% of Bulgaria's GDP for that year.

In addition, it also provides a qualitative assessment of the state of the system (which after two months was specified by Mr. Dimitrov's information), in which some nuances are of essential importance and are worth mentioning and interpreting separately.

• There are no pre-investment studies for these 11 billion, but such studies will begin in 2020 in the districts of Veliko Tarnovo, Gabrovo, Pleven, Sofia Region, Targovishte and Haskovo;
• Although it was built for a country with a population of 9 million and industry with an approximate 55% weight in GDP (with all the conditionalities of applying the relevant GDP calculation methodology to the economy before 1990), the water supply system cannot cope ("in a number of settlements in summer and autumn there is a shortage of drinking water") with the water supply because it is outdated and the costs of its maintenance are increasing;
• Another problem is the diversion of drinking water for irrigation and the fact that this water is de facto stolen, which is difficult to prove;
• The prices of water for drinking or other needs could not be increased, because then some "threshold of social tolerance" would be exceeded, which remains undefined for now.

In this situation and partly as a result of this argument, the government decided at the end of January 2020 to establish a state-owned "Bulgarian Water and Sanitation Holding" EAD (BWH), the company was entered into the Commercial Register on May 5 of the same year. The coincidence with Karl Marx's birthday is pure coincidence. But it is no coincidence that BWH is capitalized with 1 billion leva.

It is not entirely clear why such a decision was made in the year of economic downturn due to COVID-19. Of course, there are references to the water shortage in Pernik and the above-quoted assessments of the two ministers. [iii]

However, according to the available data of the Ministry of Environment and Water (MoEW), for the period 2015-2018 the average multi-annual (1981-2018) water runoff did not deteriorate, and the amount of water from the internal runoff (i.e. excluding the Danube River) even improved. This is especially evident in the data for 2015-2018 for precipitation, evapotranspiration (water evaporation), total renewable freshwater resources and available groundwater available for annual use.

The conclusion of the Ministry of Environment and Water is that:

• Bulgaria is distinguished by relatively significant fresh water resources compared to other European countries, both in absolute volume and per capita.
• Water shortages can occur in regions with low rainfall, high population density, water-intensive industrial production, combined with specific natural and geographical features.

Let us now return to the current prices of drinking water.

The KEWR price list in effect since January 1 this year shows that prices have actually been reduced.

For one water and sewerage operator, the reduction is almost 17%, for a dozen of them the reduction is between 6 and 13 percent. For example, the price of water in Burgas is reduced by about 10%, in Sliven - by 14.2%, in Dobrich - by 13%, Yambol - by 12.3%, and in Vidin - by 10.4%.

The largest increase in the price of water is in Sofia – 6.1%, but there are minor increases of 0.5 to 2% in Pernik, Pleven, Gabrovo and Kardzhali.

The comparison of the new prices with the financial statements for 2018 shows that EWRC has generally taken into account the financial indicators of the companies where there is a significant price reduction, but it is also obvious that the assessment of the resource for upgrading and repairing the system is not included in the price determination in any way.

Comments

BViK

1. The financing of the Water and Sanitation Department with taxpayer funds is 1% of the country's estimated GDP for 2020, or ¼ of the measures announced in March of the same year using the government's fiscal reserve to "deal" with the consequences of the pandemic.
2. Of the funds actually spent for this purpose (i.e. the 60/40 scheme, financial schemes through the Bulgarian National Bank and benefits paid to unemployment and pensioners), the financing of the Water and Sanitation Department is almost 1/3.
3. Since, according to almost 40 years of data on water in the country from the Ministry of Environment and Water, no real reduction in available water is observed, and the problems with drinking water supply are local, the creation of the Water and Sewerage Authority is a rather dubious undertaking.
4. It reflects an old illusion from the Communist Manifesto (1848), specifically point 7 of its “economic” program, that “increasing the number of state factories” solves some problem. [iv]
5. In this case, if the statements are to be believed, it is probably a question of the “threshold of social tolerance.” Similar arguments were previously heard from Ms. Maya Manolova as the Ombudsman (especially with regard to “Sofiiska Voda”), from representatives of the Bulgarian Socialist Party, and less frequently from Ataka and VMRO.
6. The BViK website shares the holding's mission: "The creation of "Bulgarian Water and Sewerage Holding" EAD is a consequence of a recognized need on the part of the Government of the Republic of Bulgaria for decisive preventive measures related to improving the quality of water supply and sewage services in the country while maintaining socially acceptable prices for these services, as well as the adverse effects of climate change (mainly drought)."
7. The effects of the creation of BViK cannot be traced yet. The company's website resembles a think tank's website. It is evident that some consultations have been given on minor issues, there is information about treatment plants, the length of the water supply network and other details. Two orders for the preparation of annual financial reports have been announced, but the reports themselves have not been published. There is no information on the investment page either. Since BViK is still a "holding", there should also be information about the subsidiaries. This sub-page as of May 12 this year is completely empty.
8. The most interesting part of the page is the "news" sub-page: it makes it clear that the BViK wants the EWRC to issue a new price list, i.e. to finance its activities, since the money has apparently run out.
9. The latter is evidenced by a January response by Minister Grozdan Karadjov to a parliamentary question. It becomes clear that by the end of the third quarter of 2021, BViK reported a loss of BGN 944 million.
10. Probably one of the motives of the EWRC to set precisely these water prices, which were cited above, is the expectation that the Water and Sewerage Authority will carry out its assigned mission.

Effects of Water and Sewerage Ownership

1. Not only BViK, but also all 43 Water and Sewerage operators in the country, according to the list of KEVR (see the first link above), are either 100% state-owned (16 companies) or mixed ownership dominated by the state under a 51:49 percent scheme, with 49% being the share of municipal ownership or a private operator, 11 companies are municipally owned.
2. The mixed ownership in "Sofiiska Voda" is 77.1 to 22.9 percent in favor of the private operator. This is probably why it is the most frequent object of political spells. A check on the Internet shows 5,800 publications (mostly news and reprints) on the occasion of the ombudsmen's calls for inspections and changes in the pricing policy of this and other companies that are mixed ownership. "The collection rate of 96% in Sofia should go to 60-70% like in many other water utilities," Vladimir Karolev pointed out in one of his analyses from the end of 2018.
3. The NSI data shows that:
4. From 2010 to 2020, the average amount of water supplied was 909 million m3 per year, with the lowest in 2020 (about 50 million m3 below the annual average), probably due to the contraction of economic activity and travel, including to work;
5. Over the same period, annual fluctuations in the quantities of total water consumed (both billed and unbilled) are observed, but consumption remains relatively constant;
6. Of the indicated average annual consumption of 909 million m3, an average annual consumption of 529 million m3 or 58.2%;
7. More than 4/5 of this amount is water loss during transportation, i.e. through pipes; data is for the period after 2015.
8. Municipal and 100% state-owned companies in the relatively poor regions of the country are facing bankruptcy in March 2022 due to the inability to pay for the electricity supplied.
9. This is the case with Vidin Water Supply and Sewerage (100% state-owned and an unrepeatable network of pipes from 1965-1980, depending on the sources and settlements), whose prices for 2022 have been reduced, although by less than elsewhere, according to the EWRC price list. For these regions, a specific analysis of the state of the water supply networks and the social and demographic effects of this state is necessary.
10. The above-quoted estimate of the investment needs of the Water Supply and Sewerage sector of 11 billion leva is 1 billion less than the value of these needs from the 10-year national strategy for the development of water supply in the country. It is possible that the financing of the Water Supply and Sewerage Sector can be considered as the implementation of this strategy.

Solutions

EWRC seems more inclined to update the prices of used drinking water in the direction of covering water losses and repairs to water supply and treatment systems for water and sewage operators with significant private participation or in joint ventures.

There are only two fully private water and sewerage operators in the country – those of Lukoil-Neftochim and Golden Sands. In these cases, problems are solved from the revenues from the activities of the enterprises.

The issue requires further analysis, but available data indicate that accountability and efficiency under 100% state ownership of water and sanitation are lower than all available alternatives. However, the conclusion of the MoEW from 2018 that local water sources and economic structures are of paramount importance remains valid.

The experience with BViK contradicts the finding that the problems in the sector are 50 years old or more. This is a period of dominant state ownership in the sector. With more state-owned companies, the problems of the sector are unlikely to be solved.

Closing BViK will reduce the expenditure of public funds for the water supply system. At the moment, the only prospect for this company is to repeat the practice of other similar companies such as "Avtomagistrali", API, etc.

Concessioning is the only relatively well-regulated way of privately providing the public service of water supply. It is also a relatively good alternative to the dominant tradition of public-private partnerships in the country. In this tradition, the public interest is represented by an official or body, and the private interest by their friends.

The “social affordability threshold” is not a problem. Keeping prices low is a de facto subsidy of water waste by everyone and of water costs for wealthier households. Social inclusion statistics provide ample opportunities to identify, design and implement policies that can neutralize possible negative effects for relatively poor households or people with material deprivation.

When the public service "water supply" is privately provided, it is politically easier to require compliance with legal regulations for the use of all types of water and water sources, including those for sanitary protection zones.

The political effect is that candidates for elected office at the local or national level lose significant leverage to influence voters and the central budget when concessioning water and sanitation.

(To be continued)

[i] The author is a lecturer at Sofia University, one of the founders and first executive director of IME ( www.ime.bg ), now chairman of its board, member of the Mont Pelerin Society and the NOUS network, as well as manager of KS2 EOOD and chairman of the Environmental Protection Commission in the Supreme Soviet (1990-1991)

[ii] The side conclusion from the picture presented below is that his predecessor Neno Dimov did not have much choice in managing drinking water resources.

[iii] There are no analyses on the topics of their statements on the websites of the relevant ministries. Nor was there any during the discussion prior to the adoption of the relevant order by the Council of Ministers.

[iv] Overall, the comparison of this program with the views of Bulgarian political parties and the tax policies of the G-7, the IMF, and many EU countries shows and leaves the impression that the measures proposed in it are very relevant.

Did you like it? Take a minute to support the EKIP on Patreon!