WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— Raja Constanta, Romania Teodor Popa and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study RAJA CONSTANTINA, ROMANIA Context • Upper-middle-income country • Aggregation covering urban and rural areas • Medium level of WSS performance Purpose Performance, professionalization, environment benefits, economic efficiency, equity Scope WSS functions and services Scale • Administrative boundaries • Localities covered: 134 for water and 18 for wastewater • Population covered: 731,021 inhabitants for water and 485,660 for wastewater • Coverage: 98 percent for water and 87 percent for wastewater • Connections: 136,611 for water and 66,352 for wastewater • Network length: 3,710 km for water and 1,526 for wastewater Process Top-down with financial incentives Governance • Delegated (49 years) • Public company • Decision making: The County Council holds 97 percent of utility shares, and 33 municipalities hold the remaining 3 percent, according to the water volume distributed in each settlement. • Asset transfer: Assets remain the property of local and county authorities, and are being transferred to the operator for the duration of the delegation contract. • Liability: Liabilities and debts from previous operators were not taken over by the aggregated utility. • Staff transfer: All staff were to be transferred to the aggregated utility. • Clear entry and exit rules 1 In 2006, Raja Constanta was among the first water The process had two stages. The first consisted of the supply and wastewater (WSS) utilities in Romania to concentration of the operation of services provided to implement the top-down aggregation reform designed a group of municipalities at county level. The second, by the central government, as it was perceived as a which has not been achieved yet, aims to concentrate great opportunity to develop investments, expand these county utilities further, into river basin utilities. operating area, and consolidate leadership among The overall aggregation reform is based on three key public water operators in Romania. Despite the quality institutional elements: an intercommunity develop- of the dialogue between some local authorities and ment association (IDA), a regional operating company Raja Constanta, which is directly reflected in the suc- (ROC), and a contract of delegation of services. The cess of this aggregation, a decade after the process IDA is the sole interlocutor of the ROC, representing started, there was still a strong political resistance the common interests of its member municipalities opposing what was perceived by some municipal regarding water and wastewater services, especially representatives as a loss of power and control. with regard to general strategy, investments, and tariff policy. The ROC is a commercial company, owned by From Fragmentation to Aggregation of the IDA member municipalities, to which the manage- WSS Utilities in Romania ment of the water and wastewater service is delegated The water sector in Romania has followed a contrast- through a delegation contract. The ROC is thus ing evolution, fluctuating between fragmentation and appointed to manage, operate, maintain, upgrade, aggregation. Before the 1990s, Romanian water ser- renew, and expand, where appropriate, all public vices were supplied at the county level by companies assets designated in the contract. It collects the that were also providing other public services such as invoices paid by customers, in accordance with solid waste collection, heating, and so on. Water infra- the  contract provisions. The purpose for aggrega- structure investments were entirely subsidized by the tion  in Romania, as stated in the official Guide on central government budget, and operational costs Regionalization, is the “improvement of sector perfor- were subsidized by local authorities or through mance by a better management and professionalism, cross-subsidies, with industries paying a higher tariff as well as benefiting from scale economies.” However, than institutions and domestic users. Immediately in the views of the European Commission and the after the fall of the socialist system (in 1989), the oper- Romanian government, the regionalization process ating areas of these services started to narrow down, as was also a means to promote integrated water resources local authorities each wanted to have their own public management in order to comply with EU directives service operators. As a result, hundreds of WSS utili- and create environmental benefits. It was as well a way ties were then created. In a reverse movement, a com- to set up financial solidarity through cross-subsidies at prehensive water sector aggregation reform was the county level, and to offset decreases in water sales. designed in 2005–2007 and implemented during the Service quality and technical capacity enhancement five following years. This regionalization consisted of a were also targeted, especially because large invest- top-down mandatory process incentivized by EU ment projects were planned. investment grants as Sectoral Operational Program for the Environment (SOPE) funds were allocated only to projects led by a regional operator. From an institu- Raja Constanta, a WSS Utility Controlled tional perspective, the regionalization was generally by the Constanta County Council… performed through the reorganization of public ser- Constanta is one of the most important cities in vices operated by the capital city of the county. Romania, with a powerful economy. It is the largest 2 Case Study—Raja Constanta, Romania MAP 1. Municipalities Served by Raja Constanta port on the Black Sea and the Romanian Riviera. Its As a result, the company is under the sole control of the water operator, Raja Constanta, which was already one County Council, which is common in Romania, as most of the largest water utilities in the country, took advan- ROCs are controlled by counties or county capitals. tage of the EU SOPE investment program to upgrade its According to Romanian law,2 the ownership of public infrastructure and expand further its service area. WSS assets remains in the hands of local and county Some attempts were made to operate in Moldova and authorities, and they receive a royalty fee to be used to to prospect markets in neighboring countries. cover the infrastructure debt repayment. Assets were not part of the ROC capital and therefore did not confer In 2007, Raja Constanta was turned into a commercial any  shareholder right. This caused confusion and company owned by public local authorities, as required dissatisfaction among some decision makers, as some of by the aggregation reform provisions. Such a legal evolu- them would have liked to retain more control over oriented tion was to transform utilities into business-­ the operator. entities, financially autonomous from municipal budgets. The County Council received 97 percent of the The regionalization process led by Raja Constanta was ROC  shares, and the 33 municipalities1 served by Raja relatively smooth and spread until 2014. The process Constanta hold the remaining 3 percent, allocated accord- was greatly stimulated by the fact that aggregation was ing to the water volume distributed in each settlement. an eligibility criterion for access to SOPE and European Case Study—Raja Constanta, Romania 3 Bank for Regional Development funds. Hence, Raja In 2013, in order to decrease the number of employees, Constanta decided to take over services in locali- the company launched a restructuring plan, using ties  benefiting from these funds and to cofinance a  human resources consulting firm. As a result, investments. The process was also stimulated by 626  employees were dismissed, which amounted to Raja  Constanta’s decision to take on all former staff, 25  percent of the total number of employees at the provide increased salaries, and commit to not make time. The collective dismissal process complied with all any redundancy during the first two or three years of labor law provisions and was carried out with full trans- operation. However, some of the services taken over parency and communication with unions and staff over were heavily overstaffed. As a result, the number a 10-month period. Social movements and protests of  Raja Constanta employees increased by nearly were avoided. Only eight legal actions were filed by for- 50 percent and labor costs doubled. mer employees, and all were won by the operator. TABLE 1. Evolution of Personnel Expenses, Number of Staff, Population Served, and Number of Connections in the Area Serviced by Raja Constanta Item 2007 2008 2009 2010 2011 2012 2013 2014 2015 Personnel expenses 40,626 51,337 51,223 64,197 81,188 92,017 99,799 103,557 91,227 (000 lei) No. of staff 1,804 1,888 1,952 2,419 2,652 2,676 2,787 2,700 2,201 Population served 498,376 501,843 607,650 626,298 690,630 695,100 705,996 739,007 731,021 No. of connections 75,050 81,893 108,894 116,721 121,727 125,727 127,097 135,940 136,611 FIGURE 1. Evolution of Raja Constanta Service Area Before and After Aggregation 160 151 152 132 140 133 134 134 126 118 120 114 108 99 102 100 No. of localities 77 83 80 62 57 61 60 55 55 55 55 55 52 45 45 45 45 45 47 40 16 16 16 18 18 18 18 18 20 10 10 10 10 10 10 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Urban Rural Total 4 Case Study—Raja Constanta, Romania ... But Spreading over Seven Counties phone number. This central dispatch coordinates and monitors all field interventions. Compared with other operators in Romania, Raja Constanta has the specificity to have implemented investment projects in neighboring counties, thus A Positive Outcome for the Regionalization expanding beyond the strict limits of Constanta Process Led by Raja Constanta County. As a result, Raja Constanta took over localities Municipalities where the service has been taken from seven counties where operators lacked the tech- over  by Raja Constanta have witnessed a dramatic nical capacity to operate WSS systems and to invest. In improvement in terms of technical capacity, environ- September 2008, Raja Constanta was providing water mental benefits, equity, and service quality. Since Raja services to approximately 500,000 inhabitants in 57 Constanta took over, WSS systems have been rehabili- localities. Six years later (in 2014), the operator served tated or replaced. New wastewater treatment plants 750,000 people in 152 cities, towns, and villages.3 have been built, and the new service has been upgraded During the same period, the number of residents to European standards. All assets have been inventoried receiving sewerage services increased from 365,000 to in a database connected to geographic information over 485,000. Nearly 95 percent of wastewater is now systems. Accounting practices have been improved. treated in 15 upgraded wastewater treatment plants A  medium- and long-term investment plan has been that conduct secondary treatment. elaborated. In some municipalities, prior to the region- The scale of aggregation was first shaped by the SOPE alization, the service was not continuous and water funds, as Raja Constanta expanded in municipalities was being delivered according to an intermittent, pre- benefiting from those funds, whether they belonged defined program. When Raja Constanta took over, to Constanta County or to other counties. It took over service was provided continuously, regardless of costs. all water services and functions in localities where In terms of economic efficiency, the outcomes of the there was no wastewater treatment or only dysfunc- aggregation show an increase in both the revenues and tional facilities, and limited water and sewerage sys- OPEX of Raja Constanta. tems. One of the rationales for the scale of aggregation was to create or develop WSS infrastructure. Water FIGURE 2. Evolution of Income and OPEX systems have been physically interconnected as much as possible in several areas. Along with its 300,000 expansion, Raja Constanta made structural changes 250,000 to the organization of its seven regional centers to keep costs under control and improve teams’ work 200,000 Income (RON) response. Whenever taking over a new service, Raja 150,000 Constanta integrates the new service activities billing, accounting, legal services, quality control, (­ 100,000 and so on) within its existing departments. In 2010, it 50,000 created a supervisory control and data acquisition (SCADA) center that enables remote access and con- 0 trol of large-scale processes related to WSS systems in 10 08 09 14 12 13 11 15 07 20 20 20 20 20 20 20 20 20 multiple sites and over large distances. In 2016, the Income OPEX local dispatches were abolished, replaced by a central dispatch that customers can reach using a unique Note: OPEX = operating expenses. Case Study—Raja Constanta, Romania 5 FIGURE 3. Evolution of Staff Productivity and OPEX Structure After Aggregation a. Sta productivity b. OPEX structure 80 140,000 70 120,000 51% 60 100,000 Income (RON) 50 80,000 52% 36% 40 60,000 30 30% 40,000 20 185 20,000 13% 10 0 0 08 09 10 12 13 14 08 09 10 12 13 11 11 15 14 07 15 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Sta productivity per connection Other Personnel Energy (sta / '000 connections) Sta productivity per m3 sold (sta / '1 000 000 m3) TABLE 2. Water Services 2007 2008 2009 2010 2011 2012 2013 2014 2015 OPEX/connection (RON/con.) 843 912 704 732 837 920 965 865 854 OPEX/water sold (RON/m ) 3 1.42 1.70 1.90 2.02 2.44 2.81 3.08 3.07 3.06 TABLE 3. Sewerage Services 2007 2008 2009 2010 2011 2012 2013 2014 2015 OPEX/connection (RON/con.) 662 636 543 565 680 721 712 647 705 OPEX/water billed (RON/m ) 3 0.71 0.81 0.87 0.88 1.10 1.15 1.33 1.44 1.53 The evolution of OPEX was driven mainly by the staff However, the evolution of quality criteria is unambigu- transfer agreement, which happened to be a financial ous, as coverage and quality of service clearly increased burden for the company. Later, some efforts were from 2007 to 2015. made to improve staff productivity and to lower energy costs. In addition, to supply water, Raja Constanta is A Strong Determination to Overcome extracting it from underground, which entails high Long-Lived Political Resistance and to electricity consumption. Achieve Quality Improvements Comparing OPEX per connection and OPEX per unit of The Constanta County Council and the city of water sold shows even greater contrast. For water and Constanta supported the operator and the investment wastewater, OPEX per water sold or billed more than projects throughout the whole regionalization process. doubled from 2007 to 2015, whereas OPEX per connec- However, owing to the pressure to absorb EU funding, tion is increasing for wastewater and staying steady the national aggregation reform was passed quickly, over time for water. which did not allow for proper information and 6 Case Study—Raja Constanta, Romania engagement with local authorities and citizens. The unanimously. However, Raja Constanta continued to government prepared master plans for each county charge fees according to the tariffs stipulated in the and did not have time to complete them with more delegation  contract, and the resistance was over- comprehensive technical and economic data informed come. The  operator’s determination to implement by local governments. As a result, Raja Constanta expe- the aggregation and stick to the contract provisions rienced some resistance, as the regionalization process was decisive in overcoming obstacles and achieving was perceived by some local representatives as a loss the most intensive aggregation in Romania. This of control over the WSS utility. Hence, 10 years after the would not have been possible without the con- beginning of the process, the operator’s determination stant support of the main shareholders of the utility. and capacity to overcome political resistance was Moreover, the stability of the executive ­management— abruptly tested. which had remained unchanged since 2003—gave In 2016, the city of Cernavoda was virulently against great credibility to the operator and underscored the tariff increase policy although it benefited from a its  leadership. As of today, Raja Constanta has new water supply system with high-quality water achieved improvements in service coverage and extracted from underground sources and financed by quality as well as technical capacity. But heavy trans- SOPE funds. The Cernavoda City Council unilater- action costs related to staff transfers as well as ally  adopted a decision to halve the water price. increasing OPEX due to large investment projects Although the decision was unlawful, it was adopted have not allowed the utility to improve economic FIGURE 4. Evolution of Raja Constanta Key Performance Indicators After Aggregation a. Water service coverage b. Metering level 100 95 98 90 96 85 94 80 Percent Percent 75 92 70 90 65 88 60 86 55 84 50 12 08 10 08 09 10 13 14 09 11 12 13 14 07 15 07 11 15 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 c. Non revenue water d. Breaks 90 7 m3/kilometer in the network/day 80 6 no./kilometer/per year 70 5 60 50 4 40 3 30 2 20 10 1 0 0 09 10 08 11 12 13 14 08 09 10 11 12 13 14 07 15 07 15 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Case Study—Raja Constanta, Romania 7 efficiency yet. However, utility directors managed to Aggregation Forces More Explicit Decision-Making implement a tariff policy allowing the utility to cover Processes, Leading to Better Corporate Governance operating costs. EU financial incentives fully bene- Aggregation involves the creation of a new, separate fited the utility and its customers, with an invest- organizational entity that is accountable to more than ment program of €278 million being implemented. one stakeholder. Therefore, aggregations present an As a result, services taken over by Raja Constanta opportunity to adopt sound corporate governance have managed to get out of the low-level equilibrium principles related to autonomy and accountability. trap, thus breaking the vicious cycle of low price–low Raja Constanta has been turned into a commercial pub- quality. Last but not least, governance arrangements lic company as a result of the regionalization reform. proved effective and robust enough to address politi- cal issues, to implement large investment projects, to Having a Stable Leader or Champion throughout the set up a policy on increasing tariffs, and to enhance Aggregation Often Improves the Likelihood of Success the overall performance of the service. The Constanta County Council and the city of Constanta supported Raja Constanta throughout the Aggregation Case Study at a Glance whole regionalization process. Moreover, the general manager of Raja Constanta is an important local and Key Lessons Learned from Aggregation Case Study national leader in the water sector, with extensive Staff Transfer Can Generate Heavy Transaction Costs, experience in public administration and in business which Can Hamper Aggregation Success entrepreneurship in the private sector. He used to be Transaction costs occurring before, during, and after the deputy mayor of Constanta, and as such he directly aggregation can hamper aggregation success, or limit took part in the water sector institutional reforms. In and delay the materialization of its benefits. In the case 2013, he became the president of the Romanian Water of Raja Constanta, staff transfer from former municipal Association. Having such a leader proved crucial to structures into the newly aggregated utility generated overcoming political resistance when a municipality heavy transaction costs which translated into signifi- opposed a water tariff increase by unilaterally halving cant and long-lasting labor cost increases. the price. Raja Constanta continued to charge fees according to the delegation contract provisions and Financial Support and/or Incentives Are Important to received the support of the utility shareholders. Help Services Get Out of the Low-Level Equilibrium Moreover, the stability of the executive management, Trap (“Big Push”) which has remained unchanged since 2003, gave great In Romania, the Ministry of Environment took the oppor- credibility to the operator, ensuring its leadership. tunity of EU funding to establish coercive eligibility criteria that helped trigger and speed up the aggregation Notes reform, namely a Guide on Regionalization and Guidelines 1. Only some of the localities served by Raja Constanta are shareholders for Applicants to SOPE Funds. The scale of aggregation of of the company; these localities are the ones that were served by the Raja Constanta was shaped by the SOPE funds, as the util- utility prior to the aggregation process. ity preferentially expanded in municipalities benefiting 2. Law n° 213/1998 on public property and its legal regime. from those funds, whether they were in Constanta County 3. A local authority could consist of more than one locality; therefore, or not. As a result, Raja Constanta accessed an overall the number of localities covered by Raja Constanta is higher than the amount of €278 million in investment subsidies. number of local authorities. 8 Case Study—Raja Constanta, Romania © 2017 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. 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