Water pricing policy and future trends in Europe

1. PwC Water pricing policy and future trends in Europe International Conference of the Citizens Movement Athens – May 16, 2005

2. Main issues What is water pricing in Europe? • A result of water costs Or • A political decision - for social reasons - because of an absence of knowledge The MEIF project achieved for the EU brings some replies in this field

3. Agenda Presentation of the MEIF project Presentation of MEIF 'smain conclusions Pressing issues related to the water sector Conclusions

4. Presentation of the MEIF Project rationale The MEIF project relies on 3 key variables • INVESTMENT : to improve the knowledge of the need for investment in water and sanitation in Europe, by trying to define principles that could lead to a method of investment evaluation at European level • FINANCING : to study future appropriate strategies concerning the financing of water investment needs • PRICE : to analyse and to anticipate the consequences of water investment financing on water prices

5. Countries involved

6. Agenda Presentation of the MEIF project Presentation of MEIF 's main conclusions Pressing issues related to the water sector Conclusions

7. Water costs structure Financing Investments Costs Public subsidies This Expenditures / Resources table has been designed to explain how are financed the annual costs of water Water Agencies Operating Costs Price of water Loans Repayments

8. OBJECTIVES To set an inventory of methods To identify the best practices To define the methodology bases leading to homogeneous approaches A guide of reference principles to apply suitable methods ENCOUNTERED DIFFICULTIES Evaluation still running (UWWTD/DWD) Mechanisms and methods not packaged Perimeters of responsabilities not clear Various level of hamonization at national scale Relationship between actors doubtful Investment costs integration and water pricing

9. Level of complexity and organization  Geophen’s methods (France) +   Expertise combined with data collection (Spain / GB /Hungary /…)       Ways of doing” Gminas / drinking water evaluation (Poland)  - Ways of doing Practices Methods or methodological bases Evaluation methods for investments

10. Evaluation methods for investments Top down NATIONAL SCALE Reporting decision RADIANT Accountability Technology and costs Characterisation of needs Bottom up Identification of needs LOCAL SCALE

11. Spain/ Italy Microscopic / Weak opening / Large works approach Great Britain References of costs / Heterogenous patrimony management France Many methods tested / To accurate and to put in routine Evaluation methods for investments Engineering approaches / Patrimony management Germany

12. Hungary/ Czech R. Basin methods / Intermediary agents / Inspection ? Harmonisation ? Poland National environment fund approach / No transparancy Bulgaria/ Romania Local feasability studies approach / National ?? Evaluation methods for investment

13. Dividends Equity Profits Financing (Bonds & Loans) Interest relief Investments Costs Public subsidies International Grants Water Agencies Price of water Operating Costs Financial strategies andwater pricing RESOURCES EXPENDITURES This Expenditures / Resources table has been designed to explain how are financed the annual costs of water.Resources can be for instance: Loans Repayments

14. Equity and debt: England and Wales Towards full cost recovery: France and Germany Price and subsidies: Italy and Spain Diversified sources: Hungary, Czech Republic and Poland Price, subsidies and grants: Romania and Bulgaria Decision in a web of constraints Interaction between financing sources Varying availability of sources Quality of sources but also quantity Typology of water pricing strategies

15. Main issues • There is a lack of accurate information on expenditures in the water sector • This is due to the lack of monitoring and reporting tools at the local, regional and national levels to track the financial flows related to the water sector • Prospective required by the WFD can only be carried out if a information can be gathered on past and present water financing framework.

16. Water pricingFeatures for a prospective analysis • Scenarios are to be devised by territories • A complex thread of three variables • Investment needs • Financing strategies • Water prices • Criteria for territory segmentation • External features • Institutional issues • Management and operation

17. Water pricingA diagnosis • EU core principles are correctly understood... • Towards sound systems of tariffs • A general objective of cost recovery • ...But unevenly implemented • Currently, water prices alone cannot finance investments • Territories are confronted to very different situations

18. Water pricing in the future • Two key questions • What is the relevant perimeter of investment ? • Which accompanying measures ? • if price is not an adjustment variable... • ...measures adapted to each type of territories • Suggestions for water policing • Sound and fare crosssubsidies • How to set a boundary across services • How to organise solidarity across territories • How to anticipate future expernditures • Access to forms of cheap capital funds • Opportunities for mutual funding, in the water industry in Europe • Water demand elasticity to water prices • A reflexive issue • In need of further knowledge

19. Agenda Presentation of the MEIF project Presentation ofMEIF 's main conclusions Pressing issues related to the water sector Conclusions

20. Consistency of investment scope • Currently, great variations in the scope of investments taken into account in statistical consolidation at the national level (especially in terms of storm and rain water management). • Develop a nomenclature of investments in the water sector: • Raw water and water transfers • Potable water • Sanitation • Rain and stormwater • Propose quality and technological levels to qualify investment choices.

21. Micro and Macro approaches • Currently, few countries rely on both bottom-up and top-bottom approaches to assess investments. Furthermore few countries attempt to reconcile both approaches to refine their assessment. Therefore, there is a need to : • Develop both bottom-up and top bottom methodologies. • Provide reconciliation guidelines. • Conduct pilot studies in test areas.

22. A European water observatory Building upon the knowledge based outlined in the MEIF project, set up a European water observatory whose main duties would be: • Tracking and collecting data on water investment, financing and prices. • Identifying and disseminating best practices in terms of: • Investments assessments • Financial planning • Private involvement • Technological improvements

23. Prospective on water pricing and cost recovery Cross-subsidies (between services, customers, or territories) can be very helpful to articulate investment needs, sound financial strategies, and acceptable water prices. Such cross-subsidies are compatible with the full cost recovery principle, as long as the exact nature and volume of these subsidies are identified and communicated. Cross-subsidies should therefore be explored as a financial strategy when: • üfinancial resources are scarce, • üthe willingness to pay is unevenly spread among the population, • üthe ability to pay for the service varies as well, • üthe amount of investment needs is very different depending on territories (cities vs. rural areas, main city vs. small towns, etc.). The principle certainly deserves scrutiny. Economic analysis would help reflect on how groups of customers are segmented, and contribute (or benefit) to a general equilibrium of the economics of water, at European level.

24. Elasticity of consumption and water prices • A key variable for both policy and industry matters is the maximum level of price customers are ready to pay, for water services. Variables are connected in complex ways : • The willingness to pay depends on the quality of the service and the education the customers has been exposed • The answer should probably be devised for different types of customers (business vs. domestic, urban vs. rural, etc.) • Price increases are consequential for water uses, and the arbitrage between uses • To address this question, it might be useful to have recourse to a variety of method, that include statistical research, econometrics and modelling, surveys. The consequences for policy making would certainly be of most interest, at Community, national and local levels.

25. Typologies of territories • 2 main problems for small to medium towns: • Private sector participation generally occurs earliest in a country’s large metropolitan areas, those with populations of at least half a million. A private contractor will often find it harder to make sufficient returns on its investments in small networks unless it operates many in the same region • Access to financial markets is often cost effective only for large municipalities • Example of solutions to tackle these problems: • Several smaller towns can be grouped into a single service area large enough to provide the economies necessary to attract private investment while keeping tariffs affordable • Pooling arrangements should be developed at the national or regional level

26. Agenda Presentation of the MEIF project Presentation MEIF 's main conclusions Pressing Issues related to the water sector Conclusions

27. Knowledge Management Accounts tools Specialists Knowledge, information and forecasting tools Basic principles to drive a good estimation : THE DATA MANAGEMENT !  Quality / Updated / Well extrapolated  About real performances of the operating equipment  Good choices of technology regarding objectives to goal  Economical basis of calculations : Justified / Detailed  Coherent gross calculating at upper scale Therefore tools and actors able to verify these principles

28.  Improvement of comparability Professional procedures for evaluation Rather than Macroscopic expertise  Data base management Knowledge, information and forecasting tools

29.  Facilitate sharing of practices  From private stakeholders to public stakeholders in economics Investments Methods/ Studies  To develop patrimonial culture Knowledge, information and forecasting tools  To promote the method / The studies / Investments

30. Knowledge, information and forecasting tools • Nomenclature of investments / Data bases / Units costs Infrastructures and technologies • Financial Expenditures / Ressources table • Reconciling micro and macro level approaches to investment assessment Models to apply / To adjust ..… But difficulties : Local specificities …..

31. Key issues The uneven situation of territories Subsidies or perequation ? Sound nomenclatures Service Investment vs operation EU funding A historical perspective The current situation Across services Civil works, personal charges, financial costs Rain water, storage, transportation of raw water Across territories Intercity structures, larger territories Across time To anticipate future expenses and investments Pricing results from past and future financing strategies The EU position Towards full cost recovery Exceptions, on social, environmental and economic grounds Transparency of subsidies and transfers Solidarity, cross-subsidies

32. Future trends and water cost recovery • The Water Framework Directive (WFD) requires to improve the knowledge of water costs recovery • Reaching a good ecological state of water in 2015 will lead to higher costs because of a substantial increase of investments • Future trends will depend of the level of cost recovery (more than the private sector participation) • Ensuring transparency for the citizens will require : • to develop reporting tools at local and national levels • to provide information to know the cost sharing between the tax payer and the water user. 

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