NOVEMBER 2016 WORLD BANK / MINISTRY OF TRANSPORT AND INFRASTRUCTURE / NATIONAL WATER COUNCIL WATER FOR PEOPLE - FINANCIAL POLICY AND IMPLEMENTATION MEASURES FINAL REPORT – FINAL DRAFT ADDRESS COWI A/S Parallelvej 2 2800 Kongens Lyngby Denmark TEL +45 56 40 00 00 FAX +45 56 40 99 99 WWW cowi.com NOVEMBER 2016 WORLD BANK / MINISTRY OF TRANSPORT AND INFRASTRUCTURE / NATIONAL WATER COUNCIL WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES FINAL REPORT – FINAL VERSION PROJECT NO. DOCUMENT NO. A076585 4 VERSION DATE OF ISSUE DESCRIPTION PREPARED CHECKED APPROVED 3 20 November High level briefing document MJA, LGJ, MBRB LGJ MJA 2016 on WSS policy and finance (all COWI), PGA, SKA (ValuADD) WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES V FOREWORD The current project is part of the ongoing reform of the water supply and sanitation (WSS) sector in Albania. A Steering Group composed by main stakeholders (Water Regulatory Authority, Ministry of Transport and Infrastructure, Technical Secretariat of the National Water Council, Water delegate of the Delivery Unit, WSS General Directorate and WSS Benchmarking Unit, and Ministry of Finance) has guided the project from its inception during the summer of 2015. Based on meetings with the Steering Committee, Technical Secretariat of the National Water Council, the Minister of Transport and Infrastructure and the Vice Minister of Finance during May 2016 the project delivered a Financing Strategy for the WSS sector in June 2016. This was approved by the Ministry of Transport and Infrastructure in August 2016. Amongst others the approval letter stated: “The Ministry of Transport and Infrastructure appreciates the first phase and gives its endorsement to it. We endorse to continue the second phase with the proposed Scenario #4 as per the report and as per the approval of the Ministry of Finance. [The second phase] consists of concrete policy [proposals] and financial instruments to implement the adopted scenario”. This Final Report includes those concrete policy proposals and financial instruments. Prior to submitting the report, the team has met key stakeholders including the Technical Secretariat of the National Water Council, the Minister of Transport and Infrastructure, the Vice Minister of Finance, the Chairman of the Regulator as well as representatives of the two associations of municipalities in order to have their feed-back and considerations in relation to the concrete policy proposals and financial instruments. These meetings have guided the concrete proposals. For example, tariffs under the policy continue to be affordable for the poorest 10 per cent of the population also after increases in tariffs of less than 10 per cent per year in some years. The policy measures include a pro-poor subsidy scheme. The national budget contribution as well as foreign loans to the sector are kept in line with Ministry of Finance guidelines. This policy document has been prepared to further inform and facilitate the work of the Water for People thematic group of the National Water Council as well as the policy makers in the Ministry of Transport and Infrastructure. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx VI NATIONAL FINANCIAL WATER POLICY AND STRATEGY ABBREVIATIONS AND TERMS 3Ts Taxes, Transfers and Tariffs BAU Business as Usual CAPEX Capital expenditure DMA District Metering Area DPUK Water and Sewerage Department of the Ministry of Transport and Infrastructure EBRD European Bank for Reconstruction and Development EIB European Investment Bank ERRU Albanian acronym for the Water Regulatory Authority EU European Union EUR Euro GDP Gross Domestic Product GIZ German International Co-operation HES Household expenditure survey IFI International Financing Institution INSTAT Statistical Institute of Albania KfW German Development Bank kW Kilo Watt kWh Kilo Watt Hours LGU Local Government Unit LSMS Living standards measurement survey NA Not applicable NIPAC National Instrument for Pre-Accession Coordinator NRW Non-revenue water OPEX Operational expenditure PES Payment for environmental services WACC Weighted average cost of capital WB World Bank WRA Water Regulatory Authority WSS Water supply and sanitation http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES VII CONTENTS 0 Executive Summary 1 0.1 Rationale and link to water sector reform 1 0.2 Process of preparation. 1 0.3 A financial model 2 0.4 An ambitious, but realistic, scenario for WSS sector development 2 0.5 Financing of the Water for People Policy 3 0.6 The policy is affordable 4 0.7 State provides framework, the municipality- owned utilities make decisions 5 1 Introduction 6 1.1 Overview of the report 6 1.2 Acknowledgements 6 2 WSS Services Financing Vision and Policy Principles 8 2.1 Policy Framework 8 2.2 Water supply and sanitation sector finances 9 2.3 Expenditure requirements in the Master Plan 13 2.4 The Water for People Financing Policy 14 3 3T financing the “Water for People Policy” 20 4 Redesign Investment Flows and Instruments 26 4.1 Capital expenditure for service improvement: Coverage 26 4.2 Capital expenditure for service improvement: Continuity 30 4.3 Policy measures to enhance efficiency 32 4.4 Innovative instruments to redesign investment flows 40 http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx VIII NATIONAL FINANCIAL WATER POLICY AND STRATEGY 5 Evaluation of New Sources of Financing 42 5.1 Polluter Pays 42 5.2 Payment for environmental services 43 6 Improvements of Tariff Setting 44 6.1 Policy target: Viability in service provision 44 6.2 Tariff structures better aligned to cost structures 45 6.3 Tariffs ensure that WSS services continue to be affordable 46 7 Enhancement to Subsidy Schemes 47 7.1 Operational subsidies 47 7.2 Pro-poor subsidies 47 8 Policy is Affordable for People 49 8.1 Much headroom in current affordability 49 8.2 Water services affordable with new policy 51 8.3 Consumers can avoid coping costs 52 APPENDICES Appendix A Methodological Note on Structure and Use of Excel tool / WSS sector financing model for Albania 56 Appendix B Action Plan 57 Appendix C References 81 Appendix D Calculation of coping costs 83 D.1 Coping costs – Urban 83 D.2 Coping costs - Rural 84 D.3 Total coping costs 86 Appendix E Brief description of current tariff setting 88 http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES IX TABLE OF FIGURES Figure 1 Investments by source of financing 12 Figure 2 Source of funds 2015-2040 in million EUR in BAU and policy scenario 21 Figure 3 National budget contribution in € per inhabitant for water and wastewater Business as usual and Policy (both 2027) 22 Figure 4 International grant contribution in € per inhabitant for water and wastewater Business as usual and Policy (both 2027) 23 Figure 5 International loan contribution in € per inhabitant for water and wastewater, Business as usual and Policy (both 2027) 23 Figure 6 Tariffs in Lek/m³ for water and wastewater Current, Business as usual and Policy (both 2027) 24 Figure 7 Average residential tariff and share of households that pay 3 per cent of their income for water. Countries in Danube region 25 Figure 8 Coverage rates in percent for urban water supply: Current, “BAU” and “Policy” scenarios (both 2027) 27 Figure 9 Coverage rates in percent for rural water supply: Current, “BAU” and “Policy” scenarios (both 2027) 28 Figure 10 Coverage rates in percent for urban sewerage services: Current, “Business as usual” and “Policy” (both 2027) 29 Figure 11 Coverage rates in percent for rural sewerage services: Current, “Business as usual” and “Policy” (both 2027) 30 Figure 12 Continuity of water supply as reported by existing utilities 2014 (ranked from highest to lowest) 31 Figure 13 Continuity in hours of water supply as reported by utilities Current, “Business as usual” and “Policy” (both 2027) 32 Figure 14 Illustration of the principle in district metering 34 Figure 15 Non-revenue water in per cent Current, “BAUl” and “Policy” (both 2027) 34 Figure 16 Energy efficiency in selected utilities. 36 Figure 17 Collection of revenues in per cent. Current, “BAU” and “Policy” (both 2027) 37 Figure 18 Step-wise impacts of efficiency improvements on NPV of OPEX 38 http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx X NATIONAL FINANCIAL WATER POLICY AND STRATEGY Figure 19 Step-wise impacts of efficiency improvements on NPV of CAPEX 39 Figure 20 Step-wise impacts of efficiency improvements on NPV of Collected revenue 39 Figure 21 Step-wise impacts of efficiency improvements on NPV of P&L 40 Figure 22 Direct Operating Cost (DOC) coverage in per cent. Current, “Business as usual” and “Policy” (both 2027) 45 Figure 23 Comparing the affordable tariff for the poorest 10 per cent of households with the actual tariffs for each local government water utility 51 Figure 24 Future combined water and wastewater average tariffs for Albania in lek/m³ compared to affordability levels for income groups 52 TABLE OF TABLES Table 1 Summary of targets in “Water for People Financial Policy”. 3 Table 2 Financing of “Water for People Financial Policy” 4 Table 3 Affordable price of water by household income level 4 Table 4 Artificial Profit and Loss Statement for 2014, assuming one utility for all Albania 9 Table 5 Water sales, maintenance cost and unit maintenance costs 10 Table 6 Sources and uses of investment finance 2005 - 2015 12 Table 7 Summary of targets in “Water for People Financial Policy”. 16 Table 8 Financing for “Water for People Financial Policy” 17 Table 9 Summary of targets in “BAU” scenario. 18 Table 10 Summary of other key characteristics in “BAU” 18 Table 11 Hours of supply as reported by consumers 31 Table 12 Affordable price of water by household income level 50 Table 13 Illustration of the calculation of coping cost 54 Table 14 Proposed measures to enhance efficiency of operations 58 http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES XI Table 12 Proposed measures and how they are incorporated in the financial model 72 Table 16 Cost and life times of household water tanks and booster pump 83 Table 17 Cost of household purchases of bottled water t 84 Table 18 Coping Cost for urban households 84 Table 19 Cost and life times of borehole and hand pump 85 Table 20 Cost of household purchases of bottled water 85 Table 21 Coping Cost for urban households 86 Table 22 Illustration of the calculation of coping cost 86 http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 0 Executive Summary 0.1 Rationale and link to water sector reform In 2015 the Government of Albania requested World Bank support for the ongoing water sector reform. The overall objective is to support the Government of Albania in the development of key sector strategy implementation instruments. Specifically, the World Bank agreed with the Government to develop a Financing Strategy for operation of and investments in the water supply and sewerage (WSS) sector. The strategy reviews the existing incentive framework and proposes measures, which aim at creating incentives for more efficient WSS services. 0.2 Process of preparation. A Steering Group composed of the main stakeholders (Water Regulatory Authority, Ministry of Transport and Infrastructure, Technical Secretariat of the National Water Council, and Ministry of Finance) was formed and has guided the work of the consultants. In particular bilateral meetings were held with the Minister of Transport and Infrastructure and the Vice Minister of Finance to determine the ambitious but realistic scenario for WSS sector development which form the back bone of the Water for People Financial Policy and Implementation Measures. Following the agreement on the ambitious but realistic scenario for WSS sector development and the related policy targets, the consultants held a large number of bilateral meetings with key stakeholders, including but not limited to the Water Regulatory Authority, the Technical Secretariat of the National Water Council, the WSS General Directorate, the WSS Benchmarking Unit, the two associations of municipalities, the Water Supply and Sewerage Association of Albania the Ministry of Finance. During the same period the World Bank and the consultant reached out to key donors including the European Commission Delegation, KfW and GIZ to inform them and have inputs to the process. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 2 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 0.3 A financial model For this project, the consultant developed a financial model which calculates the cash flow of capital expenditures and operational expenditures, year by year for each of 61 local government utilities (and for Albania in total). The model has been used with a 25 year planning horizon. Operational expenditure calculations are based on the historic unit prices as presented in the annual accounts of water utilities. Capital expenditures per unit of asset (say one kilometer of sewer) have been calculated using the unit prices of the Master Plan. Necessary maintenance expenditure as a percentage of new assets have been assessed based on international norms. The model includes the cash flow of tariff revenues year by year for each of 61 local government utilities (and for Albania in total) based on historic tariffs and collection rates, whereas Government subsidies, loans and grants are allocated to each of the 61 local government utilities relative to capital expenditure needs in those case where no specific information is available. Affordability is calculated by comparing the costs of consumption of 100 liters tap water per capita per day for an average size household with the region specific household incomes as these are available in the latest Living Standard Measurement Survey. The model provides results for each of 61 utilities as well as national results for all of Albania. It has been used to assess the implications for service, investment and operational expenditure requirements, affordability, composition of sector financing, financial viability etc. of alternative scenarios. The results of a number of scenarios was reported to Government in May 2016 a report entitled “Financing Strategy Report”. 0.4 An ambitious, but realistic, scenario for WSS sector development The work started from the 2010-2017 WSS Sector Strategy and the existing Master Plan. Unfortunately, the 2010-2017 WSS Sector Strategy and the Government approved Master Plan require very large annual expenditures. The Master Plan requires 270 million EUR available for annual capital expenditures for investments and a large and fast increase in operational expenditure for operation of wastewater treatment plants. The above mentioned financial model demonstrated that the Master Plan is not feasible. The Master Plan is incompatible with two key policy principles, viz.: › Tariff policies and tariff setting shall be publicly acceptable › Investments in the WSS sector shall be budgeted and planned in line with the fiscal budget constraint Following this realization, a number of scenarios were evaluated with the aim to balance the objective to provide service improvements as quickly with the need http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 3 for scenarios to be financially feasible. In June 2016, the Government confirmed their agreement to an ambitious but realistic scenario with the targets shown in Table 1. Table 1 Summary of targets in “Water for People Financial Policy”. Base Year Performance Target Measure 2020 2027 2040 2014 Water Service Coverage Urban % of Population 89 92 97 99 Water Service Coverage Rural % of Population 36 40 60 80 Sewerage Coverage Urban % of Population 63 65 70 80 Sewerage Coverage Rural % of Population 6 15 25 50 WWTP coverage Urban % of Population 12 50 70 80 WWTP coverage Rural % of Population 0 15 25 50 Non-Revenue Water % of System Input 67 59 47 38 Collection Efficiency % of Current Bills 91 94 96 98 Continuity of Service Hours/Day 13 24 24 24 Direct Operating Cost coverage % 98 166 231 252 Total Cost coverage % 73 90 97 100 The table illustrates that the policy implies full water service coverage in urban areas and almost full water service coverage also in rural areas. In rural areas a number of isolated dwellings will continue to rely on their own water sources. Wastewater services in urban areas will also be expanded and all agglomerations larger than 2,000 pe will eventually be covered in accordance with EU requirements starting with the bigger cities. The policy emphasizes efficiency in service provision and includes a large number of measures to enhance efficiency. Such measures typically reduce operational expenditures in addition to saving scarce natural resources. Thus these measures are both needed to achieve sector objectives and they are sometimes an objective in themselves. 0.5 Financing of the Water for People Policy Table 2 summarizes how the “Water for People Financial Policy” will be financed . The table includes both financing for capital expenditures and financing for operational expenditures. Tariffs can be used to finance both operational expenditures and capital expenditures, the national budget (taxes) can also be used to finance both, but the Government has a policy to phase out operational subsidies. Finally financing from international grants (Transfers) can only be used to finance capital expenditures (investments). http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 4 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Table 2 Financing of “Water for People Financial Policy” Base Year Performance Target Measure 2020 2027 2040 2014 Average tariff for water and Lek/m 64 100 131 168 wastewater Revenue from operations (Tariffs) Million EUR p.a. 43 65 88 111 Financing from national budget Million EUR p.a. 17 26 32 36 (Taxes) Financing from International Million EUR p.a. 32 38 43 Grants (Transfers) 53 Financing from International Loans Million EUR p.a. 32 38 43 (eventually paid by Tariffs) Accumulated funding surplus Million EUR NA -36 -33 170 Table 2 illustrates that all sources of finance will have to increase considerably in order to achieve the ambitious, but realistic, targets in the “Water for People Financial Policy”. Finally, the table illustrates compatibility with the above mentioned policy principles. Tariffs increase at most 10 per cent per year and financing from the national budget is kept in line with the fiscal budget constraint. The general economic growth, assumed to be 2 per cent per year, allows a continues increase in the national budget contribution also in later years. 0.6 The policy is affordable One key policy question is whether the policy is affordable. The answer is an unequivocal “Yes the policy is affordable, even for the poorest decile of the population”. Using an international rule of thumb, the Water Regulatory Authority considers a WSS tariff to be affordable if the poorest decile household pays a maximum of 5 per cent of household income for water supply and sewerage. Table 3 Affordable price of water by household income level Gjithsej / 1st decile 2nd decile 3rd decile Average Albania (lek/m³) 132 161 199 308 Albania (EUR/m³) 0.95 1.15 1.42 2.20 The table illustrates that the 10 percent poorest household in Albania today can afford to pay 132 Lek per m³ of water. This is higher than the average tariff proposed for the next decade according to the policy. This report demonstrates that even in specific districts it is unlikely that the policy will not be affordable. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 5 0.7 State provides framework, the municipality- owned utilities make decisions The “Water for People Financial Policy” constitutes a policy framework. Since the municipalities own the utilities, the State can provide the necessary incentive framework, but municipality-owned utilities must utilize this framework to take the right decisions. The “Water for People Policy” assumes that utilities take such decisions which are in the interests of their consumers and thus also in the interests of voters in municipal elections. Therefore, the “Water for People Financial Policy” is not a one-time policy pronouncement, but rather one-step in the ongoing territorial and water sector reform process. The reader is invited to explore this step in more detail in the present report. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 6 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 1 Introduction 1.1 Overview of the report The current version is a final draft “Water for People Financial Policy and Implementation Measures”. The policy measures contained in this final draft strategy will be presented to a high-level workshop. Chapter 2 presents the Government of Albania’s overall sector financing vision as well as key policy principles. The policy principles are based on good international practice. The Chapter presents policy measures according to the building blocks agreed by the World Bank with the Water for People Group in June 2016. It summarizes and illustrates the policy targets agreed by the Government. Chapter 3 presents the sources of financing that are available to meet the policy targets. In line with international good practice, we distinguish between taxes, transfers and tariffs (3Ts) and we note that these are ultimately the only sources of finance for the water sector. Affordability is a key policy principle for the Government and Chapter 8 documents that the proposed policy is affordable for the poorest decile of the population. A detailed list of policy measures and an action plan is presented in Appendix B. 1.2 Acknowledgements The report would not have been possible without the financial support of the European Union via a World Bank Trust Fund, which is gratefully acknowledged. The authors of this report are Michael Jacobsen and Philip Giantris. Meta Reimer Brødsted and Lars Grue Jensen developed the financial model and contributed to the report. Semi Kasimati, Enkelejda Gjinali and Anri Dajko contributed to the report. Dr. Jesper Karup Pedersen (COWI) has provided quality assurance. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 7 The team acknowledges the strong support of Ms. Lindita Sotiri, Advisor to the Minister of Transport and Infrastructure as well as that of the Bank team led by David Michaud and composed of Paula Restrepo-Cadavid, Artan Guxho and Patricia Lopez (since 1 August 2016 as lead). The authors are also thankful to Mr. Hantin Bonati, Head of the Technical Secretariat of the National Water Council and his staff as well as to Ms. Vilma Biboli Director, Foreign Projects and Benchmarking Unit and her staff for providing ideas, data and information and offering various types of assistance. The authors had the opportunity to discuss the methodology and finding with Mr. Erjon Luci Deputy Minister of Finance and with the Mr. Avni Dervishi Head of the Water Regulatory Authority both of which contributed considerably to make the arguments more clear and consistent with Government policy. However, the analysis, statements and any remaining errors and material omissions are solely the responsibility of the authors. The views presented in this report are those of the authors and can in no way be taken to reflect the views or official opinion of the Government of Albania, the European Union (EU) or the World Bank. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 8 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 2 WSS Services Financing Vision and Policy Principles 2.1 Policy Framework The Government of Albania aims to expand access to and enhance the quality of water supply and wastewater services for the entire population of Albania. As part hereof the Government has agreed on the following “Water for People Financial Policy and Implementation Measures”. The ultimate aim is to provide piped water supply to all people and to provide wastewater services to protect human health and minimize negative environmental impacts. This aim will be achieved taking into account the overall policy framework: › Government sector policies operate within a macro-economic framework that limits overall public debt and is based on sound macro-economic policies. › The Government give emphasis to the need to protect the poor and vulnerable inter alia by ensuring that their utility bills are within international norms for affordability. › Albania is an EU candidate country. Government sector policies are designed with the adherence to the EU environmental acquis in mind. Within this framework, the Government has established a number of policy principles, viz.: › Water sector policies are designed to provide a framework to encourage consumers and utilities to use scarce resources effectively. › The polluter pays principle applies in line with EU practice. › Water utilities are publicly owned commercial entities in the meaning of Law 9001/2008 . Operational subsidies shall be eliminated as quickly as possible. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 9 › If subsidies are provided they shall be aimed at protecting vulnerable customers and investment subsidies shall be primarily support projects that have important public benefits but may not be financially feasible at the present time. › Eventually utilities shall cover the full cost of their operations including renewal and replacement, depreciation and financing costs. › Tariff policies and tariff setting shall be publicly acceptable and strive to ensure that WSS services are affordable in line with good international practice. In practice this implies that tariff increases must be gradual and in line with improvements in service. › Investments in the WSS sector shall be budgeted and planned in line with the fiscal budget constraint. This implies that national budget contributions must remain at approximately current levels and that foreign loans must be kept within the cap on public sector lending. Unfortunately, past sector strategies and the Government approved Master Plan have been incompatible with these last two policy principles. Past strategies and the Master Plan have aimed to demonstrate the need for investments and at the same time, to give to the Government a tool to sequence and prioritize sector investments. However, they have been unrealistic in relation to the ability and willingness of consumer and the Government Budget to finance a large and fast expansion of service coverage. This realization is the basic rationale behind the “Water for People Financial Policy” presented in this report. The following two sections analyze the current situation (Section 2.2), the expenditure requirements of the Master Plan (Section 2.3) and how Government arrived at an ambitious, but realistic scenario for future services and their financing (Section 2.4.2) 2.2 Water supply and sanitation sector finances 2.2.1 Tariffs barely cover operational expenditures Tariffs represent the main source of financing for the sector as illustrated Table 4. The net sales in 2014 were a little larger than 6 billion lek (or approximately 40 million EUR). Table 4 also illustrates that on average the operational cost coverage is close to 100 per cent. Table 4 Artificial Profit and Loss Statement for 2014, assuming one utility for all Albania http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 10 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Net sales 1,000 LEK 6,051,902 Revenues from other activities and subsidies 1,000 LEK 1,770,325 Operational costs 1,000 LEK 5,183,165 Maintenance costs 1,000 LEK 412,338 Depreciation 1,000 LEK 1,736,998 Bad debts 1,000 LEK - New bad debts 1,000 LEK Forgiven debt 1,000 LEK - Interest payment 1,000 LEK 224,402 Profit or loss 1,000 LEK 265,324 Source: Data from Benchmarking unit. Since the collection rate is only 92 per cent, the annual cash flow is short of operational and maintenance costs on average. In other words, the operational cost coverage is less than 100 per cent when measured on a cash flow basis1. As a result, on average, water utilities in Albania are not able to pay their current expenditure on a regular basis. This situation is not sustainable. Therefore, subsidies are essential for the typical water utility. Unfortunately, a major part of such subsidies take the form of amnesties or payments of energy bills by the government2. This eliminates the incentives for water utilities to improve the energy efficiency of their operations as long as they believe that energy bills do not have to be paid (or only paid in part). 2.2.2 Maintenance is insufficient Table 5 illustrates that regular operational and maintenance expenditures are (much) too low compared to what would be necessary to operate and maintain current infrastructure in a sustainable manner. Table 5 Water sales, maintenance cost and unit maintenance costs Total metered water sales Million m³ 50.242 Total unmetered water sales Million m³ 41.124 Total water sales Million m³ 91.366 Total water produced Million m³ 274.554 Maintenance cost (water only) Million lek 374.446 Maintenance cost (measured at water produced) Lek/m³ 1.36 Maintenance cost (measured at water sold) Lek/m³ 4.10 Source Benchmarking data as represented in financial model The current maintenance is not sustainable. At less than between 1 and 4 Lek per m³ (equivalent to 0.01 – 0.03 EUR per m³) maintenance costs are small – and clearly much below what is needed to maintain a water supply system. 1 One reason why this discrepancy can continue year after year is that bad debt is never written of. Thus the loss from non-paid bills accumulates on the balance sheet and is not reflected on the profit and loss statement. 2 A draft Council of Ministers Decision exists (as of 22 September 2016) which will revise the subsidy system, see Chapter 7 for a discussion hereof. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 11 The situation for sewerage is similar or even worse. Maintenance cost for sewerage in Albania constitute close to 38 milllion lek annual for maintenance3. The combined maintenance cost for water and sewerage constitute approximately 412 million lek per annum or between 1.5 and 4.1 lek per m³ (equivalent to 0.01 – 0.03 EUR per m³). The very low expenditure for maintenance may be seen in the light of asset values. These are also very low. At 38.8 billion lek in total tangible asset (land, buildings, machinery, pipes etc.) the total assets constitute a little more than 14,000 lek (or 100 EUR) for each of the 2.685 million people served. Replacement values of the existing system is likely to be 15 - 20 times as high (at 1,500 EUR – 2,000 EUR per person served)4. 2.2.3 Investments mainly financed from the National Budget and foreign donors. According to information provided by the Ministry of Transport and Infrastructure, investment finance in a typical year is 60 – 70 million EUR (equivalent to .8.4 to 9.8 billion Lek), see Figure 1, while according to Danube Water Program (2015), investment finance in the past decade has been in the 40 - 60 million EUR range. 3 Source: Benchmarking unit – as summarized in the financial model, see worksheet “calculations” line 976 and 985. 4 In the financing strategy model and scenarios presented later, we shall initially assume the current level of maintenance cost per m³ water / wastewater sold is maintained. However, in light of the above concerns that current maintenance is clearly insufficient to maintain current systems, we shall alternatively present scenarios that assume that 1 per cent of asset values are spent on maintenance annually http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 12 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 1 Investments by source of financing Source: Ministry of Transport and Infrastructure. Presentation to Steering Group Meeting June 2015 Table 6 Sources and uses of investment finance 2005 - 2015 Source: Data in Albanian Lek have been provided by the General Directorate of Water Supply and Sewerage to the team. Converted into EUR using exchange rates from www.xe.com The data illustrate that: › International funding tends to constitute between 50 per cent and 60 per cent of total investment funding, except in the last two years where the share is higher. › Relatively more international funding is allocated to wastewater; whereas › Water supply investments attract more national funding. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 13 The pattern that international funding is biased towards wastewater is found in many EU candidate countries. It provides an indication of priorities, namely that these national authorities tend to give higher priority to water supply relative to wastewater, whereas international donors tend to give higher priority to wastewater, possibly due to the (potential) transboundary implications. 2.3 Expenditure requirements in the Master Plan The National Water Supply and Sewerage Master Plan for Albania, published in 2012, is based on a sector analysis and takes previous strategies and policies into consideration, in particular the “National strategy of water supply and sewerage 2011-2017”. The Master Plan used the following sources to identify investment needs5: › Questionnaire submitted to all utilities, municipalities and communes › An Austrian Development Fund database of rural water supply › The so-called “Album 2003” a collection of water supply / wastewater project ideas submitted mainly by communes to the General Directorate of Water Supply and Sewerage. › A water balance calculation for 2040 to identify systems where additional water sources were needed. Projects were then prioritized using a multi-criteria decision model with (i) technical, (ii) financial/economic, (iii) environmental, (iv) socio-economic, and (v) institutional criteria6. Based on the priorities, a ranking in short-, mid- and long-term investment (investment plan) was defined. No financing plan. The Master Plan notes that the current level of secured financing for capital investments is 86 million EUR per annum. However, the total capital expenditure for the already financed projects and those in the Master plan is 6.8 billion EUR7 or more than 270 million EUR per annum. The Master Plan neither include a plan for how to finance the remaining capital expenditure needs nor a plan for how to finance the operational expenditure needs that will follow from enhancing the infrastructure, for example in the form of expanded networks, new wastewater treatment plants etc.8. As mentioned above, this realization was the main driver behind the Government’s decision to identify ambitious but realistic targets that can be financed and to build the “Water for People Financing Policy” on such targets. 5 IC Consulenten (2013) p. 25 6 IC Consulenten (2013) p.33 7 IC Consulenten (2013) p. 35 table 12 8 IC Consulenten (2013) Chapter 6.5 is entitled “Financial Implications”. This section includes a calculation of the potential funding gap in the sense of the Application Form for Cohesion funds. This basically calculates the share of the investment expenditures that cannot be covered by the net revenues accruing for the investment itself. The report finds large funding gaps in all but 2 utilities, and concludes that substantial tariff increases will be necessary. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 14 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 2.4 The Water for People Financing Policy 2.4.1 Four building blocks To arrive at a realistic strategy for Albania in implementing its water sector reforms, the Government of Albania decided as part of the “Water for People Policy” to jointly consider: › Redesign investment flows and instruments in particular: › A new and higher, but still realistic, level of capital expenditure funding by IFI’s and the National Budget › Investments leading to service level improvements in accordance with policy targets. › Policy measures to enhance efficiency in operations and thus reduce their costs. › Innovative financing instruments in support of enhanced and redesigned investment flows. This policy measures related to this building block are discussed in Section 4. › Evaluation of new sources of financing including: › Polluter pays models (for example in wastewater tariffs) › Tariff models that adequately charge tourists and seasonal users for their access to a WSS system ready to perform › Payment for environmental services This measures related to this building block are discussed in Section 5. › Improvement of tariff setting, including: › Realistic cost recovery levels of tariffs › Tariffs structures that align revenues to cost structures › Tariffs that continue to be affordable for the poorest and vulnerable groups This policy measures related to this building block are discussed in Section 6. › Development of better subsidy schemes, discussed in Section 7. These four building blocks are inseparable parts of the policy package, which constitutes the “Water for People Financial Policy and Implementation Measures”. 2.4.2 The process of arriving at a policy package It is possible to design alternative programs of measures and financing structures that differ in their emphasis. For example, the timing of water supply service improvements versus wastewater improvements may differ; the tariff structure and social compensation mechanisms to address affordability issues http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 15 may be designed in different ways; and the emphasis on international funding versus national (budget) funding may differ. However, the analyses show that unless there is a political will on tariffs and fiscal room to significantly increase the Albanian Government’s budget support to meet the sector’s investment needs; then it will be next to impossible to achieve “EU similar” service levels, even by 2040. Both international and Albanian experience suggests that users can accept large increases in tariffs if there is a major improvement in service levels at the same time. Similarly, both Ministry of Finance and foreign lenders are likely to be looking for a credible combination of tariff increases, efficiency improvements, and investments in order to believe that the funds they contribute will not be wasted, but will indeed improve the livelihoods of people. Therefore, international experience demonstrates that it is essential to have a complete reform package including investments, tariff increases and increased budget funding, and if tariff increases are not made as part of the package there is a big risk that there will not be another opportunity for many years. To help Government decision makers appreciate the impact of a “Policy Package” change, the Consultant has constructed a “Financial Model for Water Supply and Sanitation in Albania”9. The financial model is basically an accounting framework that ensures consistency between service level targets and the resulting expenditures. The model then compares the resulting investment as well as operational expenditures to the cash flow that result from tariff revenues as well as national budget contributions, loans and international grants. The comparison results in a balance between cash available and cash used or a surplus of cash, or a deficit of cash year by year over the 25 year planning period. Deficits in individual years can be overcome by bridge-funding (loans, revolving funds or similar), whereas an overall deficit means that the policy combination of suggested expenditures and revenues (in cash flow terms) is infeasible. The model can show results for each individual utility (municipality)10 and for Albania as a whole. From October 2015 to June 2016 a composed of representatives of the Consultant, the World Bank and representatives of the Government of Albania 9 This model is an Excel model. The model together with a User Manual entitled “Methodological Note on Structure and Use of Excel tool / WSS sector financing model for Albania” have been submitted as a separate deliverable under the present contract. The model and the user manual is available in both the English and the Albanian language. 10The model has been constructed to show the 61 new Local Government Utilities. The jurisdiction of each of these utilities covers for the entire administrative area of the Local Government in question. An earlier deliverable submitted under this project explains in detail how existing data have been transformed to be consistent with the 61 new LGUs. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 16 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES evaluated a number of possible combinations of: service targets, WSS tariffs, international loans and grant and national budget contributions. The process started from the targets given in the existing “National strategy of water supply and sewerage 2011-2017”. However, the team quickly found that the targets in this strategy were not affordable. The team also found that the 270 million EUR per annum expenditure of the requirement of the approved Master Plan was not consistent with Government policies on acceptable increases in WSS tariffs and national budget constraints. After several iterations and following consultations with the Ministry of Transport and Infrastructure, the Ministry of Finance and the Water Regulator among others, an ambitious but realistic scenario was agreed upon. This scenario was then formally approved by the Government in a letter from the Ministry of Finance to the Minister of Transport and Infrastructure. Table 7 summarizes the service and policy targets, which the Government endorsed. Furthermore, the Government instructed that these targets should form the basis for determination of policy measures for the Water for People Financial Policy. Table 7 Summary of targets in “Water for People Financial Policy”. Base Year Performance Target Measure 2020 2027 2040 20141 Water Service Coverage Urban % of Population 89 92 97 99 Water Service Coverage Rural % of Population 36 40 60 80 Sewerage Coverage Urban % of Population 63 65 70 80 Sewerage Coverage Rural % of Population 6 15 25 50 WWTP coverage Urban % of Population 12 50 70 80 WWTP coverage Rural % of Population 0 15 25 50 Non-Revenue Water % of System Input 67 59 47 38 Collection Efficiency % of Current Bills 91 94 96 98 Continuity of Service Hours/Day 13 24 24 24 Direct Operating Cost coverage2 % 98 166 231 252 Total Cost coverage2 % 73 90 97 100 Source: Targets agreed with the Steering Committee and endorsed by letter from Minister of Transport and Infrastructure dated August 2016. 1 Coverage data are calculated as a weighted average of the areas that were within the jurisdiction of water utilities in 2014 and the areas that were outside their jurisdiction. As a result, in particular rural coverage, differ from data published by the Benchmarking Unit of the Ministry of Transport and Infrastructure. The latter data only included areas that were within the jurisdiction of water utilities in 2014. 2 Measured on collections. Other important characteristics of the agreed scenario cum policy package mainly related to how the policy will be financed are illustrated below. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 17 Table 8 Financing for “Water for People Financial Policy” Base Year Performance Target Measure 2020 2027 2040 2014 Average tariff for water and Lek/m 64 100 131 168 wastewater Revenue from operations (Tariffs) Million EUR p.a. 43 65 88 111 Financing from national budget Million EUR p.a. 17 26 32 36 (Taxes) Financing from International Million EUR p.a. 32 38 43 Grants (Transfers) 53 Financing from International Loans Million EUR p.a. 32 38 43 (eventually paid by Tariffs) Accumulated funding surplus Million EUR NA -36 -33 170 Note: 1 The fixed price component of the water tariff is included and transformed into a per m³ price assuming average household size and a water consumption of 100 litres per person per day. 2 Note that it is assumed that average real incomes increase 2 per cent per annum. Thus a tariff increase of 2 per cent per annum corresponds to an unchanged “burden” on the household budget over time. Table 8 illustrates that the “Water for People Financial Policy” is consistent with the policy framework. In particular the tariff increases are not larger than what has been deemed politically acceptable and the national budget contributions are not larger than what the Ministry of Finance believes is realistic. There is a small funding gap in the beginning of the period in particular up to the year 2020. From 2020 to 2027 there is a very small surplus (the cumulated financing gap decreases by 3 million EUR over the seven year period) and toward the end of the period there is a large surplus. The small gap in the beginning of the period depends on the sequencing of the policy measures and underlines the importance of implementing those policy measures that generate additional revenue and those that reduce operational costs as soon as possible. 2.4.3 Business as usual is not an option The “Water for People Financial Policy” scenario can be compared to a continuation of the current policy or “Business as Usual” (BAU) scenario. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 18 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Table 9 Summary of targets in “BAU” scenario. Base Year Performance Target Measure 2020 2027 2040 20141 Water Service Coverage Urban % of Population 89 92 95 97 Water Service Coverage Rural % of Population 36 40 45 50 Sewerage Coverage Urban % of Population 63 65 68 71 Sewerage Coverage Rural % of Population 6 7 10 10 WWTP coverage Urban % of Population 12 39 39 39 WWTP coverage Rural % of Population 0 7 10 10 Non-Revenue Water % of System Input 67 67 67 68 Collection Efficiency % of Current Bills 91 87 87 87 Continuity of Service Hours/Day 13 24 24 24 Direct Operating Cost coverage2 % 98 103 96 92 Total Cost coverage2 % 73 66 57 58 Source: Financial Model.xlsm reflecting consultant’s interpretation of BAU. 1 Coverage data are calculated as a weighted average of the areas that were within the jurisdiction of water utilities in 2014 and the areas that were outside their jurisdiction. As a result, in particular rural coverage, differ from data published by the Benchmarking Unit of the Ministry of Transport and Infrastructure. The latter data only included areas that were within the jurisdiction of water utilities in 2014. 2 Measured on collections. Other important characteristics of the BAU scenario are illustrated below. Table 10 Summary of other key characteristics in “BAU” Base Year Performance Target Measure 2020 2027 2040 2014 Average tariff for water and Lek/m³ 1, 2 64 65 65 65 wastewater (Tariffs) Financing from national budget Million EUR p.a. 173 10 11 6 (Taxes) Financing from International Million EUR p.a. 18 18 11 Grants (Transfers) 533 Financing from International Loans Million EUR p.a. 18 18 11 (eventually paid by Tariffs) Accumulated funding surplus Million EUR NA -5 -83 -330 Note: 1 The fixed price component of the water tariff is included and transformed into a per m³ price assuming average household size and a water consumption of 100 litres per person per day. 2 Note that it is assumed that average real incomes increase 2 per cent per annum. Thus a tariff increase of 2 per cent per annum corresponds to an unchanged “burden” on the household budget over time. 3 Note that 2014 and 2015 had much more financing from budget and international sources than the previous decade. BAU assumes a return to the levels typical for the previous decade. Table 9 and Table 10 illustrate that BAU provides continued, but slow improvements in service levels. Unfortunately, BAU is not financially feasible. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 19 This is illustrated by the initially small, but rapidly growing funding gap and that fact that in BAU it is not possible to fully cover even operational expenditures. The direct operating cost coverage decreases over time. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 20 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 3 3T financing the “Water for People Policy” Increasing the level of service to users implies higher costs for water services – operations as well as investments. These higher costs can be financed in one of three ways, viz.: Taxes, transfers and tariffs (the so-called three T’s). 1 Taxes can cover the costs. This is done for (most) roads and other services where it is difficult, impractical or does not make economic sense to charge users according to their use11. Historically, this was also the case for water services but today public finances are so constrained that policy makers no longer consider it an option to pay for water services via taxes. 2 Users can cover the costs through user tariffs. This is done for telecommunications and following recent reforms also for electricity in Albania. When prices are determined by Government or publicly owned companies, the questions of affordability and political acceptability become very important. 3 International Grants (transfers) can transfer the resources of taxpayers in other countries to Albania. This is mainly done through bilateral aid programs and through the European Union Instruments for Pre-accession II (IPA II) program. Such transfers may finance, part of capital expenditures, but cannot be used to finance operational expenditures. It should be noted that loans only relocate cash payments in time. Eventually loans have to be repaid from taxes or tariffs. Loans do not constitute an ultimate source of finance, but are rather a bridging arrangement to postpone payments from taxes or tariffs. Finally in practice the full costs of operating and maintaining the WSS infrastructure and service provision are not paid. In this case, the services from 11 It is often argued that car owners pay for roads through taxes on petrol. While there is some truth in this argument, payment is indirect, the taxes go to the general budget and there is no transparent link between costs of construction and maintenance of roads and petrol taxes paid. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 21 the system gradually deteriorate as the infrastructure and equipment becomes old and dilapidated. This is what has happened in the WSS sector in most of Albania12. In this case services gradually deteriorate and user pay coping costs, for example in the form of having to establish their own water tanks and pumps. This cannot be a long-term solution. When the “Water for People Financing Policy” is implemented this will considerably increase the total sources of funds for the water services in Albania. This is illustrated in Figure 2 where the area of the left circle shows the total volume of financing under “Business as Usual” and the area of the right circle shows the total volume of financing with the “Policy”. Total financing with the policy is more than double the financing available without policy over a 25 year period. Figure 2 Source of funds 2015-2040 in million EUR in BAU and policy scenario Source: Financial model. Note: The data shown are Net Present Value data for the period 2015- 2040. The pieces in each pie show the contribution to the total funding from taxes, transfers and tariffs, respectively. The area of the individual pieces of pie shows the total amount of funding from each source, and the share of the circumference shows the share hereof in total funding. It is interesting to note that despite the tariff increases in the policy scenario tariffs do not constitute a higher share of the total revenues as a result of the policy. In other words: Water customers will experience the full benefit of the policy but their contribution to funding of the sector remains unchanged in relative terms. 3.1.1 Taxes The national budget contributions represent the taxes paid by the people of Albania. Sound macro-economic principles and competition from other sectors in need of public investments and support determine the size of contributions from the national budget. The figure below illustrates the “Business as usual” and the larger amounts allocated through the “Water for People Financial Policy”. 12 Not only Albania has chosen the way of “paying” for WSS services. Many cities in, for example, Italy have had a similar approach. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 22 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 3 National budget contribution in € per inhabitant for water and wastewater Business as usual and Policy (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. The policy is in line with sound macro-economic policies. The national budget contributions has been kept at a level only slightly higher than the current level of national budget financing to the water sector. However, a larger share of the public budget is foreseen to be used for investment financing and a (much) smaller share will, eventually, be used for operational subsidies. 3.1.2 Transfers Albania receives international support for its Water for People policies. Some of it comes in the form of grants (Transfers). The rest comes in the form of loans. Such bridge financing is very important as it allows infrastructure to be built now and “paid for later”. However, eventually loans have to be repaid either from tariff revenues or from taxes. Bridge financing is an important part of the Water for People Financial Policy. However, the responsibility to repay limits its use. Below in Figure 15 and 16 are shown the international grant and loan contribution in EUR per inhabitant in the BAU and the Policy scenario. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 23 Figure 4 International grant contribution in € per inhabitant for water and wastewater Business as usual and Policy (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Figure 5 International loan contribution in € per inhabitant for water and wastewater, Business as usual and Policy (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 24 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 3.1.3 Tariffs Currently the price paid for water services in Albania is very low compared to the price paid in other countries in the region and the service is low. Calculations show that most people can afford to pay higher tariffs and are willing to do so to receive better service. The Water for People Financial Policy walks on two legs: Substantial improvements in the service that the citizens of Albania will experience, and closely linked hereto, substantial increases in tariffs. Figure 6 Tariffs in Lek/m³ for water and wastewater Current, Business as usual and Policy (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Note: the tariff shown is the sum of the volumetric water and wastewater tariff as well as the fixed monthly fee converted to a volumetric tariff using average household size and an assumption that each person in the household consumes 100 liters per day. Comparing the average residential tariffs across the region the Albanien tariff is below average. This is illustrated in Figure 7 which shows average tariffs for the countries in the Danube region. Figure 7 also illustrate the share of households whose expenditures for WSS services exceed 3 per cent of household income. The figure illustrates that in Bulgaria approximately 6 out of 10 households pay at least 3 per cent of their household income for water, while in the countries of the former Yugoslavia (ex. Croatia) and in Albania the share of households that pay at least 3 per cent of their income for water is very low – less than 5 per cent. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 25 Figure 7 Average residential tariff and share of households that pay more than 3 per cent of their income for water. Countries in Danube region Share of households that pay more than 3 per cent of their income for WSS Source: IBRD and World Bank (2015) Water and wastewater services in the Danube region A state of the Sector. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 26 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 4 Redesign Investment Flows and Instruments In this chapter, the components of the first building block “Redesign investment flows and instruments” are reviewed. In Section 4.1 we present the consequences of: › A new and higher, but still realistic, level of capital expenditure funding by IFI’s and the National Budget › Investments leading to service level improvements in accordance with policy targets. In Section 4.3 we present: › Policy measures to enhance efficiency in operations and thus reduce their costs. Efficiency enhancing measures are at the same time policy measures that reduce operational expenditures and reduce use of scarce resources such as water and energy, and, policy targets for the Government. The Government has defined specific key performance targets for efficiency measures in order to provide incentives to utilities to implement such measures. In this Chapter the various policy measures to be adopted and the ambition of what to be achieved by the policy measure in the different scenarios are presented. This is done at a general level, whereas Appendix A summarizes the policy measures that underpin the “Water for People Financial Policy”, where a detailed description of the policy measures, the actions needed, who is responsible for the action, the deadline for action and the expected impact of the action are shown. 4.1 Capital expenditure for service improvement: Coverage The Government has devised a strategy, which provides a significant and sustained increase in service coverage. Figure 8 illustrates today’s coverage and http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 27 compares with the future in 1) Business as Usual (BAU) scenario, as well as, 2) “Water for People Financial Policy” scenario (Henceforth “Policy” scenario. In this and the following figures, improvements in coverage have been spread evenly across the country for illustration purposes. In reality, investments will not be evenly spread in time and space, but will occur as lumpy investments in specific towns and districts. While the financial model enables the user to capture this on a district-by-district basis, this document is intended to illustrate the national impact of policy, not to illustrate the sequencing of specific investments. Thus, here we do not illustrate the effects of particular projects (such as a wastewater treatment plan, planned for Vlore) even if we know that they have been started or are about to start. Figure 8 Coverage rates in percent for urban water supply: Current, “BAU” and “Policy” scenarios (both 2027)13 Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Figure 8 illustrates that even in the BAU scenario coverage rates for urban water supply will increase from the current average of 89 per cent to above 95 per cent throughout the country. In the Policy scenario coverage increases to at least 97 per cent to 99 per cent. This is equivalent to an increase of 10 percentage points compared to the present situation or an additional 225 thousand urban people served with public piped water. 13 This map and all the following have been created for the new local government unit water utilities. Data refer to the new municipality areas (also for the historical year) and not just to the former areas of jurisdiction for utility service. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 28 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 9 Coverage rates in percent for rural water supply: Current, “BAU” and “Policy” scenarios (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Figure 9 illustrates that while rural areas get better coverage already in “BAU” scenario this is much more pronounced with the “Policy” scenario, which will lead to an increase in rural area water coverage from a current level of 36 per cent to 60 per cent in 2027 and 80 per cent in 2040. This is equivalent to an increase of 44 percentage points or an additional 880 thousand people served with public piped water. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 29 Figure 10 Coverage rates in percent for urban sewerage services: Current, “Business as usual” and “Policy” (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Figure 10 illustrates that while urban areas get better wastewater coverage already in “Business as Usual” scenario this is much more pronounced with “Policy” scenario, which will lead to an increase in urban area sewerage coverage from a current level of 64 per cent to 70 per cent in 2027 and 80 per cent in 2040. This is equivalent to an increase of 16 percentage points or an additional 360 thousand people served with sewers. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 30 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 11 Coverage rates in percent for rural sewerage services: Current, “Business as usual” and “Policy” (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Similarly, Figure 11 illustrates that while rural areas get better wastewater coverage already in “Business as Usual” scenario this is much more pronounced with “Government Policy”, which will lead to an increase in rural sewerage coverage from a current level of 6 per cent to 25 per cent in 2027 and 50 per cent in 2040. This is equivalent to an increase of 44 percentage points or an additional 880 thousand people served with sewers 4.2 Capital expenditure for service improvement: Continuity While most of the population is served with piped water supply, very few have access to this service 24/7. Only four utilities provide continuous water supply14 and 85 per cent of consumers report that water is available 6 hours per day or less15. 14 Data from Benchmarking Unit as report in COWI (2016), see p. 68. According to the data provided by utilities themselves the average availability is 12 hour per day, see COWI (2016) p. 55. 15 Data from INSTAT (2014) LSMS Survey based on COWI access to raw data and reported in COWI (2016) p.69. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 31 Table 11 Hours of supply as reported by consumers Per cent Cumulative per cent 0-6 hours 84.5 84.5 6-12 hours 12.0 96.5 12-18 hours 2.5 99.0 18-24 hours 1.0 100.0 Source: Consultant’s tabulation based on raw data from LSMS. Comparing Figure 12 that shows data as reported by utilities with Table 11 that show data reported by consumers, one understands that consumer’s tend to have a less positive view of the situation than utilities report. Figure 12 Continuity of water supply as reported by existing utilities 2014 (ranked from highest to lowest) Source: Data from database of the Benchmarking and Monitoring Unit of GDWSS – existing LGUs. 24/7 water supply is a core target of the “Water for People Financial Policy”. This will require careful implementation at municipal utility level of the measures included and suggested in the Government’s WSS strategy. With careful implementation, continuous water supply can be achieved in most districts of the country as illustrated in Figure 13. The figure illustrates today’s continuity and compares with the future in 1) “BAU” scenario, as well as, 2) “Policy” scenario. In this and the following figures, the rate of improvement has been increased evenly across the country for illustration purposes16. 16 The financial model enables the user to analyze these same variables for any of the 61 LGU utilities. For the purposes of the national policy paper even distribution of improvements has been assumed. When the model is used for a specific utility, utility specific circumstance and improvement plans will need to be taken into account to give the most accurate picture. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 32 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 13 Continuity in hours of water supply as reported by utilities Current, “Business as usual” and “Policy” (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Note: 2015 displays the new utilities. Since these combine utilities, no LGU has a continuity of 24 hours in the figure. There is a slight upgrade of the continuity in the BAU scenario whereas in the Policy scenario there is a markedly improvements in continuity where a substantial part of Albania will experience 24/7 water supply. 4.3 Policy measures to enhance efficiency The WSS sector in Albania has potential to improve considerably to achieve good international practice in relation to resource use, such as reduction in Non- revenue water (NRW), efficient use of energy, labor and other inputs. The “Water for People Financial Policy” focuses on four areas where efficiency can and should be improved, viz.: › Non-revenue water › Efficiency in the use of energy › Efficiency in the use of staff and other production inputs (in addition to energy) › Revenue collection Since the municipalities own the utilities, the State provides the incentive framework that is necessary, but municipality-owned utilities must utilize this framework to take the right decisions. The “Water for People Policy” assumes that utilities take such decisions which are in the interests of their consumers and thus also in the interests of voters in municipal elections. However, experience from other countries show that utilities require sound leadership http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 33 (starting from the Mayor) to act in the interests of their customers and that such leadership is not always present. Therefore, the “Water for People Financial Policy” is not a one-time policy pronouncement, but rather one-step in the ongoing territorial and water sector reform process. The national authorities have two sets of tools to encourage municipalities and utilities to take the right decisions. First, as mentioned in Section 7.1 the Government has decided to reformulate subsidy policy such that a part of the subsidies are directed to utilities that meet certain key performance indicators. The National Water and Sewerage Authority (NAWSS) under the Ministry of Transport and Infrastructure will allocate the subsidies according to pre-agreed objective indicators and a specific formula of calculation. Second, the Water Regulator monitors the performance of water utilities including, but not limited to, their achievement of performance indicators that are agreed as part of the tariff setting process. This policy set up entails the risk for discrepancy between the performance indicators used for operational subsidies and the monitoring of indicators and tariff setting processes by the Regulator. In order to have a transparent and predictable environment for municipalities and utilities, it would be important to retain the primacy of the Regulator in setting performance indicators (as this is done as part of the tariff setting process) and to limit the role of the Department of Water and Sewerage to allocate investment subsidies according to pre-agreed objective indicators and a specific formula of calculation. 4.3.1 Non-revenue water Utilities must take a number of measures to decrease their non-revenue water. These include: › 100 per cent metering of production; › Reduction of illegal connections through systematic identification and disconnection on a recurring basis; › Increased metering of household connections and regular calibration of household meters › Reduction of technical losses primarily through a program of district metering and cost-effective investments in response to findings (see illustration in Figure 14). http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 34 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 14 Illustration of the principle in district metering Source: Strategic Alliance for water loss reduction (2016) http://www.waterloss-reduction.com/index.php/en/solutions/district-metered- areas-dmas (accessed 8 September 2016). Figure 15 shows the current NRW situation as well as the development of the NRW in both the BAU and the Policy scenarios. Figure 15 Non-revenue water in per cent Current, “BAU” and “Policy” (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 35 Note: The improvement of NRW for some utilities in BaU 2027 is due to new connections. These connections are assumed to be metered, why the NRW improves slightly. Figure 15 illustrates how NRW increases slightly in the “BAU” scenario compared to the current situation, as well as the major improvement that result from “Policy”. The effect of the many initiatives to reduce both commercial and technical water losses is evident from the figure. 4.3.2 Energy efficiency The Government of Albania with support of GIZ has carried out an analysis of the potential for energy efficiency improvements in 21 utilities in Albania17. This analysis shows a large potential for enhanced energy efficiency through right- sizing of transmission mains, network zoning and pressure management as well as investments in energy efficient pumps and motors. Many investments are very feasible with a payback period of 2 to 5 years. The “Water for People Financial Policy” makes performance related investment funds available for investments in efficiency improvements. As is the case for reduction of non- revenue water, the municipality-owned utilities must utilize the framework to take the right decisions and are assumed to do so. The “Policy” scenario in the financial model includes the investment costs of feasible energy efficiency investments as well as the resulting reductions in energy consumption and operational expenditures. Many utilities have difficulties to pay the energy bills. This is particularly true for utilities that have pumped water supply systems or have a mix of pumped and gravity fed water systems. Among these utilities, 21 have been analyzed with respect to the opportunities for energy efficiency investments and their impact on energy use and water utility finances18. Figure 16 illustrates the impacts of achieving energy efficiency in those utilities. The figure shows current energy efficiency (left panel), where the usage of energy in kWh per m³ of water produced is shown, and the darker the area the more energy efficient the water utility. The potential for improvements in energy efficiency in percentage is shown in the right panel for the BAU and Policy scenarios. The darker the areas the more energy efficient the water utilities become. 17 See GIZ (2015) 18 See GIZ (2015). http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 36 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Figure 16 Energy efficiency in selected utilities. Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027.” Note: The figure shows current efficiency in kWh/m³ produced (left panel). Percentage reduction in kWh/m³ produced, “Business as usual” and “Policy” both 2027 (right panel). Figure 8 illustrates that the Policy scenario will lead to significant improvements in the utilities performance in terms of measuring energy efficiency, whereas in the BAU scenario only generates some improvements to the energy efficiency. All investments shown are feasible19 and the figure shows the low-hanging fruits. It is possible that investments in additional districts would also be feasible. 4.3.3 Staff and other operational efficiency Over the years, it is expected that utilities take a large number of measures to enhance their operational efficiency including staff efficiency to a level that is close to good European standards. As with other efficiency improvement measures the State provides the incentive framework that is necessary, but municipality-owned utilities must utilize this framework to take the right decisions. 19NPV is positive with typical pay-back periods of two to five years. Note that the investments are not restricted to new energy – efficiency pumps. Rather they typically involve a combination of (re-)zoning of pressures in the water supply networks, additional storage tanks and other network improvements combined with new pumps. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 37 The “Policy” scenario in the financial model assumes that good European practice is achieved by 2040 and that a 25 per cent efficiency improvement can be achieved by 2027. 4.3.4 Efficiency in revenue collection The objective of this measure is to improve the tariff collection efficiency from the present average tariff collection level of 90% to a level corresponding to good international practice. This will improve the cash flow of the water utilities. In this case, the Regulator considers revenue collection when approving tariff increases and thereby provides the incentive framework that is necessary, but municipality-owned utilities are still the ones that must take the right decisions. The Policy scenario in the financial model assumes that good European practice is achieved by 2040 and that a 96 per cent collection efficiency can be achieved by 2027. This is an area where utilities can improve their situation faster and thus generate more cash to provide better service. Several utilities have potential for increasing their revenue collection, while others are already effective and collect more or less all of their revenue. The “Policy” scenario involves improvements in revenue collections which will also improve the financial situation of the utilities. The development of revenue collection is displayed below for both the ”BAU” and the “Policy” scenario in 2027. Figure 17 Collection of revenues in per cent. Current, “BAU” and “Policy” (both 2027) Source: Benchmarking data for current, financial model data for “BAU 2027” and “Policy 2027”. Figure 9 illustrate that presently there are significant differences in the utilities collection efficiency. A significant proportion of light areas shows that collection http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 38 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES efficiency are significantly below expected figures. This is the case at present situation as well as for the BAU scenario. BAU may lead to further reductions in the share of revenues collected if utilities do not make concerted efforts to collect all revenue due. However, the Policy scenario shows significant improvements in collection efficiency. This will improve the cash-flow of the utilities and their ability to finance a higher proportion of the investments. 4.3.5 The combined effect of policy measures to enhance efficiency Efficiency improvements is pivotal to the “Good Health” of water utilities in the future. Efficiency improvement reduces resource use and has a positive impact on the financial health of the utilities. However, efficiency improvements do not come free. They require major management efforts and typically some initial financing as well. The financial impacts of efficiency improvements are illustrated in Figure 18 to Figure 21. The figures shows the “Business as Usual” data for the year 2027 and the marginal effects of: › Non-revenue water reduction. › Energy efficiency improvements. › Staff and other operational efficiency improvement. › Enhanced efficiency in the collection of revenues. Figure 18 Step-wise impacts of efficiency improvements on NPV of OPEX Source: Financial model calculations http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 39 The first three efficiency measures lead to a fall in operational expenses. However, the reduction in non-revenue water comes by a large investment in capital expenditures. Furthermore, the calibration of meters is to be covered by the operations, why the impact showed above is lower than the gross savings in operational expenditures. Figure 19 Step-wise impacts of efficiency improvements on NPV of CAPEX Source: Financial model calculations The collection of revenue increases due to the two measures; reduction of non- revenue water and increased collection efficiency. The increased revenues caused by the reduction of non-revenue water comes from additional sales by removing illegal connections. Figure 20 Step-wise impacts of efficiency improvements on NPV of Collected revenue Source: Financial model calculations http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 40 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES The overall impact on the P&L is more or less zero due to the large investments that is just covered by the fall in operational expenditures and the increase in collections. However, the investments will lead to reduced operational expenditures and increased collection benefits after 2027, why the P&L effect will become positive over time. Increasing the analysis period to 2040 the net impact on P&L is 40 billion lek. Figure 21 Step-wise impacts of efficiency improvements on NPV of P&L Source: Financial model calculations The achievement of efficiency measures gives leeway to improvements of the policy targets as capital can be freed for investments in the long run. 4.4 Innovative instruments to redesign investment flows The Water for People Financing Policy encourages innovative instruments to enhance and redesign investment flows, including: 1 Instruments that enhance the opportunities for commercial financing. 2 Instruments to enhance investment flows for example improved access to lending from international financing agencies. 3 Instruments that attempt to influence investment behavior. 4.4.1 Enhanced commercial financing Currently Albanian water utilities do not have access to commercial long-term financing. Even very feasible projects cannot be financed from the banking http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 41 system. As a result, most utilities utilize only traditional trade financing, a few have more extensive supplier credits20. There are a number of reasons for this state of affairs, including the lack of assets that can meaningfully be used as collateral, the inability to charge sufficient revenues and use the revenue stream as collateral, underdevelopment of the banking sector in Albania, bankruptcy laws etc. The Government is addressing several of these issues through other initiatives, typically initiatives that are not water sector specific. 4.4.2 Improved access to lending from international financing agencies Instruments exists that enhance access to lending from international financing agencies. For example, the Western Balkans Investment Framework provides access to grants for project preparation for projects that are linked to a loan in an IFI (EIB, EBRD, KfW or, possibly, the World Bank). The Government encourages utilities to come forward with good project proposals for consideration for inclusion in the Single Project Pipeline. In other Balkan countries (for example Bulgaria) the international development banks have provided credit lines that water utilities can draw on for investment activities. If there is a demand, it is likely that such a credit line could also be made available for Albania. However, until utilities have much stronger balance sheets and a credit rating it is likely that the IFIs will require a sovereign guarantee. It is Government policy to support the utilities in their efforts to improve their balance sheet. The Government may work together with the World Bank to institute a system of credit rating for water utilities. 4.4.3 Instruments that influence investment behavior Influencing behavior of the water utilities is a key part of the Water Sector Reform. As mentioned, Pillar 2 of the subsidy scheme is designed to influence operational behavior. The Government is considering introducing formula-based allocation of investment subsidies with the aim to encourage investments in water supply and sewage services in hitherto unserved areas. 20In the case of Korca, the two investments that they did, relatively recently, were for the replacement of their original customer meters with "smart meters", and also for the installation of a solar panel energy system at their wastewater treatment plant that produces around 75-80% of their energy needs at the plant. Both investments were done through vendor financing with repayment periods of 6.5 to 7.5 years. The Utility did not have a financial lender arrangement, such as with a bank. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 42 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 5 Evaluation of New Sources of Financing The Water for People Financial Policy includes new financing policy measures in line with three principles: › Polluter pays models (for example in wastewater tariffs) › Payment for Environmental Services (also called beneficiary pays) › These are discussed in the following sections. › Tariff models that adequately charge tourists and seasonal users for their access to a WSS system ready to perform. This overlaps with the measures under the heading “Tariff structures aligned to cost structures” which is part of the building block “Improvements in tariff setting” and is discussed in Section 6.2. 5.1 Polluter Pays The EU environmental acquis is a key driver behind the Water for People Financing Policy. › The Water Framework Directive and the Drinking Water Directive determine the breath and scope of investments as detailed in the WSS Master Plan approved by Government in 2013. › The acquis suggests the use of the cost recovery principle, which has formed a basis for the policy. › The Water Framework Directive also institutionalizes the Polluter Pays principle (further discussed below). The EU acquis provides a framework for sector financing. Generally, the principles of polluter pays and cost recovery apply to use of water and discharge of wastewater in the EU. In relation to the WSS sector the primary focus is on consideration of water abstraction fees (also for utilities) and how to implement http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 43 wastewater discharge fees that reflect the pollution and the associated costs of treatment. 5.2 Payment for environmental services Payment for environmental services (PES) are schemes whereby the beneficiary compensates the polluter for his reduction of pollution (or enhancing the resource). A very large and classical PES scheme is found in the US, where New York City pays a number of communities upstream in the Catskills to protect the water source of New York City. Compensation includes support to construct wastewater collection and treatment in these communities, compensation to farmers that avoid intensive agricultural activity close to natural streams etc. By keeping their water source clean and abundant, the City saves very large amounts annually in avoided costs for treatment of drinking water. Such beneficiary pays models could also be consistent with the EU acquis, but such schemes are not common in the European Union. There is a World Bank funded pilot study in Albania. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 44 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 6 Improvements of Tariff Setting The Water for People Financial Policy includes improvements in tariff setting in line with the following principles: › Realistic cost recovery levels of tariffs. › Tariff structures aligned to cost structures. › Tariff policies and tariff setting shall strive to ensure that WSS services are affordable in line with good international practice. 6.1 Policy target: Viability in service provision Today the financial position of the many utilities is unsatisfactory. In Figure 22 it is illustrated that a number of utilities today are “in red”; their revenues do not even cover their direct operating costs. It is necessary for any water utility to cover at least the direct operating costs but also depreciation and interest payments even when there is access to grants and loans for investments. The figure illustrates that the situation will get worse in the “Business as usual” as continued external financial support enables utilities to build treatment plants and other infrastructure that they cannot afford to operate and maintain. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 45 Figure 22 Direct Operating Cost (DOC) coverage in per cent. Current, “Business as usual” and “Policy” (both 2027) Source: Benchmarking data for current, Financial model data for “BAU 2027” and “Policy 2027” Note: The figure shows revenues/DOC in percent The combined effect of the policy initiatives is to secure long-term viability of the WSS utilities. This includes tariff increases, enhanced operational efficiency as well as investment support. Because the current backlog of infrastructure investments and asset maintenance is very large, it is necessary to finance a large part of future investments from tariff revenues (Tariffs). For this reason, the ratio of revenues to direct operating costs has to be much higher than 100 per cent for a number of years until utilities have built up their capital reserves. 6.2 Tariff structures better aligned to cost structures Tariff structures, which more closely reflect the associated cost of providing the WSS service, are consistent with the EU acquis. The Water for People Financial Policy recommends that utilities introduce a readiness to serve charge: In areas with a very high proportion of summer residents, where the capacity of the system needed during the summer is much larger than the capacity needed during the winter, a readiness to serve charge includes a fixed monthly connection fee that reflects system capacity cost and a volumetric fee that reflects the variable costs of supplying a cubic meter of water. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 46 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 6.3 Tariffs ensure that WSS services continue to be affordable Current tariff regulation protect affordability in two ways: › Tariffs must be affordable measured as the water bill constituting no more than 5 per cent of household income for the poorest decile of households. This is in line with good international practice. › Utilities with the endorsement from municipal councils must present a tariff structure to the regulator and as part of that, utilities must analyze the consequences of increasing block tariffs. Increasing block tariffs (and lifeline tariffs) may protect vulnerable consumers. The policy assumes that these safeguards are maintained and enforced by the regulator. In cases where the safeguards are insufficient, the “Water for People Financial Policy and Implementation Measures” includes a pro-poor subsidy scheme. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 47 7 Enhancement to Subsidy Schemes 7.1 Operational subsidies The Water for People Financial Policy takes note of the recent decision by the Council of Ministers to introduce a subsidy scheme with two pillars: 1 Support to cover energy related operational costs 2 Support for utilities that demonstrate enhanced performance Pillar 1 is time bound and addresses the high energy costs and low propensity to pay energy bills of many water utilities. Pillar 2 supports the water sector reform and intends to encourage enhanced performance. The policy reinforces these subsidies with measures designed to avoid a recurrence of non-payment of power bills by water utilities. 7.2 Pro-poor subsidies As part of the Water for People Financial Policy, a pillar 3 is introduced: 3 The “pro-poor households” scheme which provides support to vulnerable households This scheme has two options: Option 1 Implementation of a subsidy scheme similar to that for the energy sector. Using the criteria for ”poor household”, the public sector issues ”water checks” to poor households based on occupancy level and designated per capita consumption allowance. Under such a scheme, the eligible poor families would be entitled to buy the first 20 litres per capita per day at no charge. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 48 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Option 2 is similar in principle to option 1. In this option, poor families are entitled to 40 litres per capita per day, which constitutes an internationally accepted lifeline. They are expected to pay half of the affordability price level, namely 65 lek per m³. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 49 8 Policy is Affordable for People This chapter first demonstrates that today’s water tariffs are much below the affordability limit according to international and Albanian norms (See Section 8.1). It then shows that the Water for People Financial Policy has been designed to keep year to year tariff increases at or below 10 per cent and to ensure that on average for Albania water tariffs continue to be affordable for the poorest 10 per cent (See Section 8.2). Finally, Section 8.3 reminds the reader that consumers today incur major coping costs to compensate for poor service. With the policy, consumers can avoid to incur coping costs in the future. 8.1 Much headroom in current affordability There is considerable room to increase household tariffs in Albania21. Using an international rule of thumb, the Water Regulatory Authority considers a WSS tariff to be affordable if the poorest decile household pays a maximum of 5 per cent of household income for water supply and sewerage. 21Article 4 of the ERRU Tariff Setting Guideline (ERRU 2011) defines affordable tariffs as those where the lowest income decile of the population pays a maximum of 5 per cent of their income. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 50 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Table 12 Affordable price of water by household income level22 Gjithsej / 1st decile 2nd decile 3rd decile Average Albania (lek/m³) 132 161 199 308 Albania (EUR/m³) 0.95 1.15 1.42 2.20 Source: INSTAT (2015): Living Standard Measurement Survey 2012 and own calculations. The table illustrates that the 10 percent poorest household in Albania can afford to pay 132 Lek per m³ of water. This is higher than any tariff from any utility in Albania. However, some parts of Albania are poorer than others. We see in Figure 23 that there are only one utility with a tariff that is higher than affordability in their prefecture. This is Podgradec utility in Korce prefecture. Korce utility (also in Korce prefecture) charge a tariff equal to the maximum affordable for the poorest 10 per cent in Korce. At the same time these two utilities have higher collection efficiency than the average for Albania, which illustrates that the supposed link between higher tariffs and lower collection may be a myth. In Figure 18 is shown a scatter diagram illustrating the relationship between the actual water tariffs (Lek/m³) along the vertical axis and the household affordability, converted or measured by the affordable water tariffs (Lek/m³) to the households along the vertical axis. The affordability is for the poorest segment of the population (first decile). The orange line show where the actual tariffs corresponds to the affordable tariff. If the utility, represented by dots, is placed above the orange line, the current household tariff exceeds the affordability tariff whereas utilities below the orange line charges a tariff lower than the affordability tariff. 22Household income data are available by prefecture. It is assumed that each person in a household uses 100 litres per day or 3 m³ per month. We use household size (rural households are larger than urban) to calculate the water use per household per month. The table shows affordability for the poorest 10 per cent (first decile), the poorest 20 per cent (second decile), the poorest 30 per cent (third decile and the average income household. By using the income data, an affordability limit of 5 percent and the potential household consumption equivalent to 100 litres per person per day, we calculate the maximum affordable price for water supply and sewerage. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 51 Figure 23 Comparing the affordable tariff for the poorest 10 per cent of households with the actual tariffs for each local government water utility23 Source: INSTAT (2015): Living Standard Measurement Survey 2012, benchmarking unit tariff database and own calculations. It is seen that almost all water utilities are charging a water tariff that are significantly below the affordable tariff (i.e. the orange line). The large distance to the orange line illustrate that even with large tariff increases the poorest 10 percent will still be able to afford water services in almost all districts even without a subsidy mechanism for poor households, according to international standards for measuring affordability 8.2 Water services affordable with new policy The “Water for People Policy” keeps tariffs affordable for the entire population including the poorest 10 per cent of the population. Tariffs increase by a 23 To create the figure we have established the affordable tariff for each of the territories of the 61 local government utilities determined by the prefecture in which the LGU is located and the share of rural / urban population. We have also calculated the tariff payed by people being supplied by this utility. The tariff is calculated as a weighted average of water supply and water supply plus wastewater tariff depending on whether people have access to wastewater collection. On the (X,Y) axis diagram, each (x,y) point represents a utility where the x-value represents the affordable tariff in the utility service areas calculated as mentioned above and the y-value represents the actual water supply and wastewater (weighted) tariff charged by the utility. The red line in the table shows the line where actual tariffs are equal to affordable tariffs. For all points to the right of / below the red line the affordable tariff is higher than the actual and for point to the left / above the red line, the actual tariff is higher than the affordable http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 52 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES maximum of 10 per cent annually up to the affordability level of the poorest and most vulnerable groups. This is illustrated in Figure 24. Figure 24 Future combined water and wastewater average tariffs for Albania in lek/m³ compared to affordability levels for income groups Source: INSTAT (2015): Living Standard Measurement Survey 2012, benchmarking unit tariff database and own calculations The figure illustrates that tariffs stay below the level of affordability for the poorest 10 per cent of Albania. Their income grows over time in line with the growth of the Albanian economy. The figure also illustrates that the pro-poor subsidy scheme implemented as part of the “Water for People Financial Policy” makes water for the poor even more affordable. The grey line in the top left of the figure illustrates how the third income decile continue to be able to pay double the tariff for water compared to what they will be paying in the future. 8.3 Consumers can avoid coping costs When safe and reliable supply of tap water is not available 24/7, households employ various coping strategies. These strategies imply costs, monetary or otherwise. There are two typically coping strategies depending on whether you are (i) an urban dweller in a permanent structure or (ii) you are a rural dweller. Peri-urban dweller living in a semi-permanent structure are most likely to have coping strategies similar to rural dwellers24. 24For the purpose of the calculation of coping costs we have assumed that all urban households that are not within the jurisdiction of a water utility have service levels and coping strategies similar to rural households. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 53 Urban dwellers in permanent structures have water tanks on the roof and in many cases pumps to ensure that the tank can be filled during periods when water is available. In addition, many urban dweller buy bottled drinking water (typically in 6-liter plastic bottles). This is used for drinking and cooking and reflects a widespread belief that tap water is not safe for drinking 25. We assume purchased drinking water as a copying cost. In case of Albania, people buy water for safety reasons, not as a preference. Interestingly, in Korce, where the water system was totally renewed some years ago and the utility provides water supply 24/7, there are now very few roof tanks, and people drink water from the tap. In rural areas, where households are not served they are likely to rely on boreholes (their own, that of their neighbor, or a communal borehole). Fetching water from springs is used to a very limited extend and buying water from water tankers is also very rare. Peri-urban areas with no piped water will also typically rely on local boreholes with hand pumps. One may calculate the total annual coping costs for households in Albania to be in the 2.5 billion lek to 3.5 billion lek (or 15 to 25 million EUR) range26. This is in the same range as the annual budget contribution to the WSS sector. Calculation steps The steps in the calculation are illustrated in Table 13. It can be seen that the annual coping costs for Albanian households is more than 5.3 billion lek. This amount constitutes much more than the annual contribution from the national budget to the sector each year. 25Needless to say being stored in a rooftop tank for an undetermined period does not improve water quality. 26 The details of the calculations are explained in an annex. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 54 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Table 13 Illustration of the calculation of coping cost Id Text Urban household w Urban Rural Total piped water household household multi- single no No Piped family family coverage coverage water dwelling dwelling 1 Share of total population in 36.71 % 12.24 % 6.05% 28.80 % 16.20% 100 % per cent1 2 Water sold in million m³ 2 50.558 16.853 NA NA 22.309 89.720 3 Primary coping strategy Water tank and Borehole and hand None NA pumping pump 4 Cost of primary coping 40 70 53 53 NA NA strategy in Lek per m³ utility water sold3 5 Share of people who do not 20 % 20 % NA NA 20 % NA believe that utility water is drinkable in per cent4 6 Secondary coping strategy5 Buy bottled water NA NA Boil NA water 7 Cost of secondary coping 96 96 NA NA 4 NA strategy in Lek per m³ utility water sold3 8 Total cost for all 2,022 1,180 325 866 NA 4,393 households applying only primary coping strategy in mill Lek 9 Total cost for all 2,654 1,391 325 866 89 5,322 households applying both primary and secondary coping strategy in mill Lek Notes: 1 Urban households constitute 55% of total population, rural constitute 45 % of total according to the Census. Coverage rates are 89% for urban and 36% for rural respectively. We assume that three quarters of the rural population live in multi-family dwellings. In this way, we calculate the shares of population in each group. 2 90 million m³ per year is the total sale to households according to data from the benchmarking unit. The distribution by family types has been done using the share of total population by family group. This is not fully correct. First, the total sales do not include sales outside jurisdictional areas and is thus probably underestimated. Second, urban coverage is higher than rural coverage, thus our calculation tends to underestimate sales in urban areas, while the net sign (over or under estimate) for rural areas cannot be determined a priori. 3 See tables above. 4 This data is from LSMS (2012). 5 Consultants assumptions. Sources: Data from LSMS on population, consultants estimates for coping strategies, share of people coping and costs, water sold from Benchmarking unit. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 55 These coping costs can be avoided by consumers who are supplied water of good drinking quality on a continuous basis by their water utility. They thus represent a potential that could be converted into a willingness to pay for better service. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 56 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Appendix A Methodological Note on Structure and Use of Excel tool / WSS sector financing model for Albania http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 57 Appendix B Action Plan This appendix summarizes the policy measures that underpin the “Water for People Financial Policy”. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 58 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Table 14 Proposed measures to enhance efficiency of operations Description of measure Actions needed Who is responsible Deadline Expected impact Institutional issues In view of the potential Ministry of Transport and Ministry of Transport and Before 31 December 2016 Clear division of responsibilities is overlap in responsibilities Infrastructure to specify in Infrastructure in coordination essential to create an environment between regulator and DPUK their internal regulations that with the Regulator in which utilities can make and it is recommended that DPUKs role continues to be implement coherent business plans responsibilities of DPUK are monitoring and allocation of clearly defined as Government budget. The WRA complementary to those of shall continue to be the regulator responsible for licensing, tariffs as well as control of utility performance including any penalties that may result from poor performance. Thus DPUK shall not have responsibilities in relation to control of municipal enterprises Strengthening of the auditing Ministry of Transport and Ministry of Transport and Before 31 December 2016 Audited data are a prerequisite for of benchmarking data Infrastructure to prepare a Infrastructure in coordination performance linked investment supplied by water utilities. In plan for strengthening of with the Ministry of Finance allocations to enhance performance view of the decision to auditing of benchmarking data and the Regulator introduce performance linked as a prerequisite for investment allocations. introduction of performance linked investment allocations. Plan must specify methodology, human resources (internal control and/or external audits) http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 59 Description of measure Actions needed Who is responsible Deadline Expected impact Preparation of a sludge Ministry of Environment to Ministry of Environment Fecal sludge management Improvement in groundwater and management plan to prepare a sludge management This is likely to require plan by 30 June 2018. surface water quality. determine the investments in plan jointly with Ministry of external technical and financial cesspool tankers and sludge Transport and Infrastructure. support treatment facilities Needs coordination with Ministry of Agriculture if it is foreseen (as an option) to re- use bio-solids on agricultural or forest lands Consistent enforcements of Enforcement based on a Ministry of Environment as From 2018 More effective operation of the discharge requirements system of self-reporting competent authority wastewater treatment plants, less including the requirement for supported by a system of pollution. Incentive for industries to pre-treatment for certain regular monitoring by the use cleaner technologies. types of wastewater and limits Competent authority. for discharge to public sewer as per Council of Ministers Decision No. 177 dated 31 March 2005 Enhance enforcement of water Enhanced enforcement based Ministry of Agriculture From 1 January 2017 Reducing costs that are currently source protection regulation on current regulations. incurred when encroachment leads to change of source or other mitigating measures Enhanced enforcement of Enhanced enforcement based Ministry of Agriculture From 1 January 2017 Creating basis for improved health licensing of private wells on current regulations. as licensed private wells need to be Licensing to be better enforced monitored for quality. Closure of wells that do not meet health standards. More households connected to piped water supply Increased coverage – water supply (See chapter 4.1) http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 60 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact Investments in urban water Planning, prioritization, project Government and utilities with Continuous over the years Coverage according to Government supply networks equivalent to preparation and financing by donor support targets achieved 37 billion lek for the period up utilities, government and to 2027 donors Investments in rural water Planning, prioritization, project Government and utilities with Continuous over the years Coverage according to Government supply networks equivalent to preparation and financing by donor support targets achieved 9 billion lek for the period up utilities, government and to 2027 donors Investments in water sources Implementation of “bulky” Government and utilities with Continuous over the years Coverage according to Government and treatment plants investments as per National donor support targets achieved equivalent to 3 billion lek for Water Master Plan. Planning, the period until 2027 prioritization, project preparation and financing by utilities, government and donors Increased coverage – wastewater (See chapter 4.1) Investments in urban sewer Planning, prioritization, project Government and utilities with Continuous over the years Coverage according to Government networks equivalent to preparation and financing by donor support targets achieved 60 billion lek for the period utilities, government and until 2027 donors Investments in rural sewer Planning, prioritization, project Government and utilities with Continuous over the years Coverage according to Government networks equivalent to 45 preparation and financing by donor support targets achieved billion lek for the period until utilities, government and 2027 donors Investments in wastewater Implementation of “bulky” Government and utilities with Continuous over the years Coverage according to Government treatment plants equivalent to investments as per National donor support targets achieved 17 billion lek for the period Water Master Plan. Planning, until 2027 prioritization, project preparation and financing by http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 61 Description of measure Actions needed Who is responsible Deadline Expected impact utilities, government and donors Investments in a Elaboration of a fecal sludge Government and utilities with Fecal sludge management Improvement in groundwater and decentralized system of septic management plan. donor support plan by 30 June 2018. surface water quality. tanks, cesspool tankers and Investments in tankers. Investments in tankers and centralized sludge treatment Establishment of a system for operation is continuous facilities equivalent to more support to financing of septic over the years than 5 billion lek for the tanks period until 2027 A program of NRW reduction comprised of (See chapter 4.3.1): Reduction of technical losses Establishment of district Utilities A plan to be prepared by A reduction of non-revenue water. primarily through a program metering areas (DMAs)27 each utility by 1 Jan 2018. Precise numbers are difficult to of district metering and cost- Regular monitoring of DMAs. A The timing of investments give. In the model, we have effective investments in program of investments to depend on the estimated calculated that the sum of the four response to findings. reduce technical losses in costs and benefits mentioned measures is a reduction response to findings. in NRW from the current level of 67 Continued monitoring and per cent to 48 per cent in 2027. action. This illustrates that NRW reduction is not trivial as major investments are involved. Metering of production Purchase and installation of Utilities Installation by 31 See above production meters to achieve December 2019 full coverage with production 27 A district is a defined area of the distribution system that can be isolated by valves and for which the quantities of water entering and leaving can be metered. The subsequent analysis of flow and pressure, especially at night when a high proportion of users are inactive, enables leakage specialists to calculate the level of leaks in the district. This can be used to determine not only whether work should be undertaken to reduce leakage, but also to compare levels of leakage in different districts and thereby target maintenance in those areas where it will have the greatest impact. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 62 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact meters. This is necessary to fully understand the water balance of the utility. Reduction of illegal A program for identification of Utilities An estimated 80 per cent See above connections illegal connections and of all illegal connections to disconnection of these be covered by 31 December 2019 Increased metering of A program for installation and Utilities An estimated 80 per cent See above household connections and regular (at least 5 –yearly) of household connections regular calibration hereof calibration of household to be metered by 31 meters December 2019 Energy efficiency (See chapter 4.3.2) Enhance efficiency in energy All utilities implement the Utilities A plan to be prepared by This is expected to lead to savings use recommendations with regard each utility by 1 Jan 2017. in energy use equivalent to a cost to energy efficient pumping All actions implemented by saving of close more than 6.5 systems that are suggested in 31 December 2019 billion lek (NPV) for an investment GIZ (2015). This requires both of 3.1 billion lek (NVP) investments and improved operational practices http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 63 Description of measure Actions needed Who is responsible Deadline Expected impact Staff efficiency (See chapter 4.3.3) All utilities need to adopt good Increase staff efficiency slowly Utilities and their municipal Initiate immediately. A With the adoption of good but surely international practices. Some owners continuous improvement international practice, the average utilities in Albania already have program monitored by the utility can reduce its staff input, staff efficiencies corresponding WRA initially with 10 percent by 2020 to good international practice. increasing to 50 per cent by 2040. Work needs to be organized better and, most importantly, politically motivated employment of staff at all levels needs to be avoided. Other resource efficiency measures (See chapter 4.3.3) Increase efficiency in use of All utilities need to adopt good Utilities Initiate immediately With the adoption of good chemicals and other inputs. international practices. Some international practice, the average utilities in Albania already have utility can reduce its input of non- efficiencies corresponding to energy, non-labor inputs, initially good international practice. with 10 percent by 2020 increasing to 50 per cent by 2040. Efficiency in collection (See chapter 4.3.4) Increase collection of bills to There is a need to improve or Utilities An improvement plan to be With up to date billing and good international practice maximize the capability of the prepared by each utility by collection systems and continuous levels billing and collection systems 1 Jan 2017. Investments in enforcement the average utility can and to validate customer systems, where needed achieve 98 per cent collection records in the field. implemented by 31 efficiency. Almost all utilities have Consistent use of legal system December 2018. billing and collection systems. This to collect overdue bills. Continuous enforcement is not considered a capital Important to avoid political expenditure need in the model. interference in billing and collection Bad debt shall be written off Change to the current Parliament, Before 30 June 2017 Improved calculation of eligible regulations according to which costs and thus tariffs. Improved commercial entities owned by incentive to collect debt. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 64 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact the public sector such as water Consistency with international utilities find it very difficult to standards and accounting write off debt. practices. Regulator to consider debt Regulator to approve debt Regulator As of 30 June 2017 See above write-off as eligible write-off as eligible expenditure while maintaining expenditure as a rule, while the Regulator’s roles as encouraging utilities to monopoly control authority increase collection rates to international levels Innovative instruments to enhance investment flows – improved access (See chapter 4.4.1 and 4.4.2) Enhance utilization of WBIF This requires projects to be Utilities and Ministry of Possible to submit Project Could contribute to stronger for investments in the water identified and included via the Transport and Infrastructure Grant Applications every pipeline of investment projects and sector. Grants are available NIPAC in the Single Project with support from NIPAC six months thus faster achievement of targets mainly for project preparation Pipeline and submitted to the Project Financiers Group of the WBIF. Consideration of An agreement with an IFI for Ministry of Transport and Such a system could be in Enhanced lending on commercial establishment of a credit line Infrastructure place by 30 December terms, leading to faster such a credit line. for water utilities 2018 achievement of targets Identification and training of national financial institutions as intermediaries Requires basic financial requirements to be in place for utilities such as a sound balance sheet, a secure and sufficiently high revenue stream. A credit rating would be helpful A system of credit ratings for Preparation of a suggestion for Ministry of Transport and Such a system could be Enhanced lending on commercial water utilities as a basis for Infrastructure initiated by 30 June 2018 terms, leading to faster a system for credit rating of enhanced access to lending on achievement of targets water utilities in Albania and http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 65 Description of measure Actions needed Who is responsible Deadline Expected impact commercial terms an initial assessment of the creditworthiness for of Albanian water utilities. The TOR shall require the system to be based on international standards and norms and be carried out by a firm with international experience. Drafting of TOR, procure firm, review reports and act on recommendations. This is likely to require external technical and financial support Analysis of the possibilities Preparation of an analysis of Ministry of Transport and Analysis with If found to be possible this may and constraints for Infrastructure in coordination recommendations enhance lending on commercial possibilities and constraints for establishment of a market for with Ministry of Finance completed by 30 June 2018 terms, leading to faster establishment of a market for water utility bonds achievement of targets water utility bonds. Drafting of TOR, procure firm, review reports and act on recommendations. This is likely to require external technical and financial support Innovative instruments to enhance investment flows – influence behavior (See chapter 4.4.3) Introduction of a component 1) Establishment of Ministry of Transport and A system in place by 31 A well-designed system will lead to in investment allocations hat Infrastructure (lead) with December 2017 utilities being managed with a agreements between the state is performance linked. (A municipalities, WRA and focus on agreed performance and municipal owners for how system in principle is included utilities. targets, while a poorly designed the performance based in Draft Council of Ministers and/or poorly audited system may http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 66 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact Decision on subsidies). allocations will work. lead to further deterioration in Implementation of the system utility performance. 2) Establishment of needs to take place during performance agreements 2017 between municipal owners and water utility management 3) Coordination of the above agreements with the Water Regulator (consider whether these should be tri-partite agreements) 3) Implementation of audits of performance indicators 4) Review of the system after, say, three years This is likely to require external technical and financial support A State Guarantee in support Establish a revolving fund that Ministry of Social Affairs and Such a system could be in Reduce resistance to achieving of a Fund that may lend to households can access, within Ministry of Finance place by 30 December mandatory sewer connections. Up households that need a total guarantee limit of say 2018 to 2019 six thousands connections financing household sewer 10 million EUR annually, thereafter 14 thousand connections. Possibly through connections annually. a financial intermediary Design of a Pro-poor Design of a scheme whereby Ministry of Transport and From Fiscal Year 2018 Faster increase in access to water investment subsidy to the grant element is larger for Infrastructure, Ministry of supply in rural and low income improve access. Can be investments that expand Social Affairs and Ministry of areas. This will have important pro- financed within the annual (piped water supply) access in Finance poor impact. allocation for investment rural and low-income areas. subsidies to water sector http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 67 Description of measure Actions needed Who is responsible Deadline Expected impact New financing policy measures – Polluter pays (See chapter 5.1) Sewer tariffs to reflect the Currently payments for Secondary legislation from the By Mid-2017 Better incentives to select cleaner associated cost of wastewater sewerage is a function of the Ministry of Environment technologies, higher revenues and treatment. volume of water consumed prepared in close collaboration better correspondence between only. There is no component with the Water and Energy revenues and cost structure for that charges for pollution. Regulator should establish a wastewater treatment plants Secondary legislation to payment structure for specify that for industrial wastewater wastewater a pollution component should be introduced. This could generate additional revenue and would create a revenue structure that better reflects the cost structure. Connection to sewers to be Model ordinance to be passed Ministry of Transport and Guideline by 31 Dec 2017 Maximum participation in sewerage mandatory for both existing by each Municipal Council. All Infrastructure should develop Must include a phased plan and wastewater treatment services and new properties new constructions must the model ordinance jointly for connection of existing and related contribution to revenue connect as part of their with the Water Regulatory buildings. stream. This reduces unit costs for building permit. Current Authority for use by local both society and individual buildings will be obliged to hire governments and make wastewater producers a licensed plumber to bring the wastewater infrastructure sewer to the property line funding condition by the within, say 2 years. passed of the model ordinance Issue guideline to local by the local municipal council governments to make connection from owners property line to sewer at no cost but with all such costs included in tariff revenues needs. Utilities must bring pipe from property line to the http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 68 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact sewer. Alternative: To charge non-connected household New financing policy measures – Beneficiary pays (See chapter 5.2) Systematic enforcement of Legislation for charging Ministry of Agriculture, Rural Immediately Improved price signals, since this the regulation on abstraction abstraction fees for raw water Development and Water cost would be passed through to fees for raw water (Council of exists and is the mandate of Administration the tariff calculation, and would Ministers Decision No. 23 the Ministry of Agriculture, provide an incentive to reduce dated 9.1.2008 “On the Forestry and Water water use including Non-Revenue approval of water use tariffs Administration. Ministry Water. as amended) should be responsible to meter, read and invoice all utilities that extract raw water. Incorporation of the findings The two studies are part of a Ministry of Environment Prior to completion of the Capturing external effects of of the two ongoing studies on WB /GEF Environmental project improved land management in a Development of Payment for Services Project from 2014. PES arrangement potentially allows Environmental Services for The project’s Steering water sources to be protected with water shed services and Committee shall ensure that a lower public expenditure outlay piloting in Tirana water prior to completion of the catchment area (Bovila and project a plan for how to Ulza reservoirs) into policy. incorporate the findings of the two PES studies. This plan shall be presented to the World Bank and the competent Ministries. Improvements in tariffs setting – align with cost structures (See chapter 6.2) Design of tariff structures to While the regulation provides Several alternatives for 31 December 2017 Better relationship between the better reflect the cost opportunities for volumetric example: tariffs and the underlying cost structure of WSS utilities in › Albanian Water Supply structure for better demand tariffs, fixed elements and particular in areas with large management, and more fairly increasing blocks, in practice and Sewerage Association seasonal population; in order sharing the costs of service http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 69 Description of measure Actions needed Who is responsible Deadline Expected impact to better address local needs the tariffs proposed by and in collaboration with the delivery. such as: Potentially, new tariffs structure used by water utilities Water Regulatory › Water Conservation could also address affordability inadequately reflect local Commission concerns and enhance revenues Priority needs. from better of (second home) › Seasonal Populations owners Demands A simple solution could be for › Capital Recovery / Debt water utilities in these areas to Service charge a “high readiness to serve” (or fixed) tariff. › Asset Management and adequate Capital Reserves The Cost Accounting Guideline Revision of the cost accounting Water Regulatory Authority 30 June 2017 Better relationship between the by ERRU shall include cost of tariffs and the underlying cost guideline capital (for example WACC) as structure for better demand per good international management, and more fairly practice in the cost calculation sharing the costs of service delivery. Automatic indexing of a All utilities will have to Water Regulatory Agency Effective for all energy Water utilities to be more resilient utility’s water tariff tied to tariff adjustments coming to changes in energy prices establish and have approved, changes in Consumer Price into effect after 30 June by the WRA, the percent that Index or electrical energy 2017. electrical energy is of the total tariff or a combination of indices. cost basis of the current tariff (similar if other specific indices are used). Improvements in tariff setting – continued affordability (see chapter 6.3) Each utility must analyze their In line with Article 7 (5) and Water Regulatory Commission End of 2017 Lifeline could address poverty and tariff structures in particular acceptability to pay issues – But Article 8 of the ERRU Tariff in collaboration with utilities with regard to a lifeline tariff. could also create issues in relation Setting Guideline the Regulator and local governments As part of the analysis of to administration and revenue should ensure that each utility lifeline tariffs each utility may generation for utilities. analyze pros and cons of a http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 70 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact analyze the consequences of lifeline tariff and present a introduction of Increasing suggestion for a life line tariff Block Tariffs (as per Article 8 (or not introducing it as the of the Tariff Setting Guideline) case may be) to the ERRU. Analysis and presentation of a proposed tariff structure This is likely to require external technical and financial support Improvement in tariff setting – industry (See chapter 6) Revise the 2011 tariff setting Linked to the introduction of Water Regulatory Commission End of 2018 Incentive for industries to introduce guideline. Wastewater tariffs requirement for pre-treatment cleaner technologies should be enhanced to include and limits on discharge to a cost-based charge on public sewers mentioned above biological pollution in addition to the volumetric charge (as This is likely to require costs largely depend on flow external technical and financial and biological pollution) support Enhanced subsidy scheme –operational (See chapter 7.1) Settlements of current arrears Clear and credible Government of Albania starting Immediately If credible – this would lead to to the Power distribution at the level of the Prime more efficient behavior among pronouncements by company and no further Minister (poorly run) utilities and to a Government that no further amnesties or subsidies. reduction in the use of scarce amnesties or subsidies will be resources (power and water) considered. Enforcement of existing rules The legislative framework is in Many stakeholders including Immediately If credible – this would lead to and regulations to ensure that place and adequate. Politicians Mayors, utility directors and more efficient behavior among arrears do not reoccur power companies (poorly run) utilities and to a at national and local level need reduction in the use of scarce to become better at not resources (power and water) interfering in sound market http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 71 Description of measure Actions needed Who is responsible Deadline Expected impact behavior – such as (water) companies having to pay for the (power) services that they buy Enhanced subsidy scheme – Pro-poor households (see chapter 7.2) Pro-poor house hold bill Implementation of a subsidy Ministry of Social Affairs and 31 December 2017 Due to very low current tariffs, a subsidy scheme Option 1 Ministry of Finance. pro poor subsidy scheme has scheme similar to that for the primarily a political function. This is energy sector. Using the also true at the tariffs proposed as criteria for ”poor household”, part of the policy. The cost of this the public sector issues ”water system is less than 2 per cent of checks” to poor households utility revenues. based on occupancy level and designated per capita consumption allowance. Under such a scheme eligible poor families would be entitled to buy the first, say 20 litres per capita per day at a very low price, 25 lek per m³ Pro-poor house hold bill Implementation of a subsidy Ministry of Social Affairs and 31 December 2017 Due to very low current tariffs, a Ministry of Finance. pro poor subsidy scheme has subsidy scheme Option 2 scheme similar to that for the (higher volume and higher primarily a political function. This is energy sector. Using the price – only effective in also true at the tariffs proposed as criteria for ”poor household”, utilities with tariffs at a part of the policy. The cost of this the public sector issues ”water system is less than ½ per cent of certain level checks” to poor households utility revenues. based on occupancy level and designated per capita consumption allowance. Under such a scheme, eligible poor http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 72 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Actions needed Who is responsible Deadline Expected impact families would be entitled to buy the first, say 40 litres per capita per day at a low price 65 lek per m³ equivalent to half the maximum affordable price. Table 15 Proposed measures and how they are incorporated in the financial model Description of measure Expected impact Incorporation in the financial model Institutional Issues In view of the potential overlap in Clear division of responsibilities is essential to create These institutional issues are framework issues for the responsibilities between regulator and DPUK an environment in which utilities can make and sector’s expenditure needs and their financing. They are not it is recommended that responsibilities of implement coherent business plans modelled in the financial model DPUK are clearly defined as complementary to those of the regulator Strengthening of the auditing of Audited data are a prerequisite for performance linked See above benchmarking data supplied by water investment allocations to enhance performance utilities. In view of the decision to introduce performance linked investment allocations. Preparation of a sludge management plan to Improvement in groundwater and surface water See above determine the investments in cesspool quality. tankers and sludge treatment facilities Consistent enforcements of the discharge More effective operation of wastewater treatment These institutional issues are framework issues for the requirements including the requirement for plants, less pollution. Incentive for industries to use sector’s expenditure needs and their financing. They are not pre-treatment for certain types of cleaner technologies. modelled in the financial model wastewater and limits for discharge to public sewer as per Council of Ministers Decision No. 177 dated 31 March 2005 Enhance enforcement of water source Reducing costs that are currently incurred when See above http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 73 Description of measure Expected impact Incorporation in the financial model protection regulation encroachment leads to change of source or other mitigating measures Enhanced enforcement of licensing of private Creating basis for improved health as licensed private See above wells wells will be monitored for quality Enhanced monitoring of private wells in Closure of wells that do not meet health standards. See above order to secure healthy water supply More households connected to piped water supply Increased coverage – Water supply Investments in urban water supply networks Coverage according to Government targets achieved The financial model calculates the necessary investments equivalent to 37 billion lek until 2027 based on the desired increase in coverage, data on length of networks per urban customer and unit costs of investments in urban networks. Investments in rural water supply networks Coverage according to Government targets achieved The financial model calculates the necessary investments equivalent to 9 billion lek until 2027 based on the desired increase in coverage, data on length of networks per rural customer and unit costs of investments in rural networks. Investments in water sources and treatment Coverage according to Government targets achieved The financial model uses data on costs and people served for plants equivalent to 3 billion lek until 2027 different types of bulky investments from the Master Plan Increased coverage - wastewater Investments in urban sewer networks Coverage according to Government targets achieved The financial model calculates the necessary investments equivalent to 60 billion lek until 2027 based on the desired increase in coverage, data on length of networks per urban customer and unit costs of investments in urban networks. Investments in urban sewer networks Coverage according to Government targets achieved The financial model calculates the necessary investments equivalent to 45 billion lek until 2027 based on the desired increase in coverage, data on length of networks per rural customer and unit costs of investments in rural networks. Investments in wastewater treatment plants Coverage according to Government targets achieved The financial model uses data on costs and people served for equivalent to 17 billion lek until 2027 different types of bulky investments from the Master Plan Investments in a decentralized system of Improvement in groundwater and surface water The financial model calculates the necessary investments septic tanks, cesspool tankers and quality based on the desired increase in coverage with septic tanks centralized sludge treatment facilities (a residual based on networks), data on unit costs of equivalent to more than 5 billion leg for the investments in septic tanks and related collection, treatment http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 74 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Expected impact Incorporation in the financial model period until 2027 and disposal systems A program of NRW reduction comprised of: Reduction of technical losses primarily A reduction of non-revenue water. Precise numbers Based on an analysis for a few utilities, we have assumed through a program of district metering and are difficult to give. In the model, we have calculated that generally the current non-revenue water is distributed cost-effective investments in response to that the sum of the four mentioned measures is a as 50 per cent technical losses, 30 per cent due to lack of finding reduction in NRW from the current level of 67 per cent metering, 8 per cent caused by malfunctioning meters and Increased metering of existing household to 48 per cent in 2027. This illustrates that NRW 12 per cent due to illegal connections. Furthermore, it is connections reduction is not trivial as major investments are assumed that the average metering level is 70 per cent and Calibration of existing meters. involved. that an average illegal connection consumes 200 m³ water Reduction of illegal connections per year. Unit costs for measures towards reductions in non- Increased metering of water production revenue water have been based on quotes from suppliers in specific projects. Energy Efficiency Enhance efficiency in energy use This is expected to lead to savings in energy use We have assumed that all utilities implement the equivalent to a cost saving of close more than 6.5 recommendations with regard to energy efficient pumping billion lek (NPV) for an investment of 3.1 billion lek systems that are suggested in GIZ (2015). Investment cost (NVP) as well as operational savings (in kWh) are taken from GIZ (2015). Staff efficiency Enhance staff efficiency slowly but surely With the adoption of good international practice, the A reduction by 50 per cent would bring the average Albanian average utility can reduce its staff input, initially with utility close to good international practice and close to the 10 percent by 2020 increasing to 50 per cent by 2040. current practice of the best performing Albanian utilities. We assume that this can be achieved with no financial costs, although the political difficulties may be considerable in certain utilities28. In reality, there is likely to be some financial costs, but these are likely to be minor. Thus we did not include them here Other resource efficiency measures Increase efficiency in use of chemicals and With the adoption of good international practice the A reduction by 50 per cent would bring the average Albanian 28 Calculation is in cost terms relative to no change in per m³ water / wastewater produced costs http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 75 Description of measure Expected impact Incorporation in the financial model other inputs. average utility can reduce its non-staff, non-energy utility close to good international practice and close to the input, initially with 10 percent by 2020 increasing to current practice of the best performing Albanian utilities. 50 per cent by 2040. There is likely to be some investment costs, but these are likely to be minor and we have not include those in the model29. Collection efficiency Increase collection of bills to good With up to date billing and collection systems and Cash flow increases to 98 per cent of sales. international practice levels continuous enforcement the average utility can achieve 98 per cent collection efficiency. Bad debt shall be written off Improved calculation of eligible costs and thus tariffs. Debt written off after three years (1/3 of total each year). Improved incentive to collect debt. Consistency with This impacts balance sheet and Profit and Loss account international standards and accounting practices. Regulator to consider debt write-off as See above See above eligible expenditure while maintaining the Regulator’s role as monopoly control authority Innovative instruments to enhance investment flows – improved access Enhance utilization of WBIF for investments Could contribute to stronger pipeline of investment The financial model includes a considerable increase in in the water sector. Grants are available projects and thus faster achievement of targets international grants and loans from a current level of 40 – 50 mainly for project preparation MEUR to more than 75 MEUR annually. Utilization of WBIF is assumed to contribute hereto. Consideration of establishment of a credit Enhanced lending on commercial terms, leading to The model enables utilities to draw on commercial credits at line for water utilities faster achievement of targets specific terms. However, the current scenarios assume that utilities do not utilize commercial credits / commercial credits are not available for them A system of credit ratings for water utilities Enhanced lending on commercial terms, leading to Part of the international support will (have to) be lending on as a basis for enhanced access to lending on faster achievement of targets commercial terms. The model includes such commercial commercial terms terms for approx. half of the international grant and loans (i.e. close to 40 MEUR annually) 29 Calculation is in cost terms relative to no change in per m³ water / wastewater produced costs http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 76 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Expected impact Incorporation in the financial model Analysis of the possibilities and constraints If found to be possible this may enhance lending on The model enables utilities to draw on commercial credits at for establishment of a market for water commercial terms, leading to faster achievement of specific terms. However, the current scenarios assume that utility bonds targets utilities do not utilize commercial credits / commercial credits are not available for them Innovative instruments to enhance investment flows – influence behavior Introduction of a component in investment A well-designed system will lead to utilities being A number of policy “handles” are available in the model. allocations hat is performance linked. (A managed with a focus on agreed performance targets, Using these, the model currently assumes that utilities system in principle is included in Draft while a poorly designed and/or poorly audited system receive public funds and improve their performance Council of Ministers Decision on subsidies). may lead to further deterioration in utility considerably in a number of areas corresponding to what we Implementation of the system needs to take performance. would expect would be the key performance areas included place during 2017 in the performance linked investment allocation system. A State Fund to fund the bridging funding Reduce resistance to achieving mandatory sewer As mentioned, the financial model assumes that all gap for households that need financing the connections. customers that can be connected to a sewer are connected household connections and that they pay the sewer fee. Design of a Pro-poor subsidy to improved Faster increase in access to water supply in rural and Such a scheme would increase the likelihood that the access low income areas. This will have important pro-poor ambitious coverage targets given in the model can be impact. achieved. New financing policy measures – Polluter pays Sewer tariffs to reflect the associated cost of Currently payments for sewerage is a function of the At the moment, the financing model includes differential wastewater treatment. volume of water consumed only. There is no sewerage tariffs by customer type. If the average industrial component that charges for pollution. tariffs increases as a result of inclusion of a pollution Secondary legislation to specify that for industrial component this will be reflected in the model including in its wastewater a pollution component should be forecasts. introduced. This could generate additional revenue and would create a revenue structure that better reflects the cost structure. Connection to sewers to be mandatory for Model ordinance to be passed by each Municipal The financial model assumes that all customers that can be both existing and new properties Council. All new constructions must connect as part of connected to a sewer are connected and that they pay the their building permit. Current buildings will be obliged sewer fee. to hire a licensed plumber to bring the sewer to the property line within, say 2 years. Alternative: In the financial model this will work the same way as if http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 77 Description of measure Expected impact Incorporation in the financial model To charge non-connected household a fee households are connected equivalent to the sewer fee New financing policy measures – Beneficiary pays Systematic enforcement of the regulation on Improved price signals, since this cost would be The financial model assumes that the regulation is enforced abstraction fees for raw water (Council of passed through to the tariff calculation, and would currently. Ministers Decision No. 23 dated 9.1.2008 provide an incentive to reduce water use including “On the approval of water use tariffs as Non-Revenue Water. amended) Incorporation of the findings of the two Capturing external effects of improved land Not included at this moment. Reporting from the detailed ongoing studies on Development of Payment management in a PES arrangement potentially allows quantitative study would be needed to determine the values for Environmental Services for water shed water sources to be protected with a lower public to be included in the model services and piloting in Tirana water expenditure outlay catchment area (Bovila and Ulza reservoirs) into policy. Improvements in tariff setting – align with costs structures Design of tariff structures to better reflect Better relationship between the tariffs and the The financial model includes both a volumetric price element the cost structure of WSS utilities in underlying cost structure for better demand and a fixed price element for each utility. In the “with policy” particular in areas with large seasonal management, and more fairly sharing the costs of version of the financial model, the model includes a population; in order to better address local service delivery. significant “readiness to serve” fixed price element. In the needs such as: Potentially, new tariffs structure could also address affordability calculation it is assumed that poor consumers › Water Conservation Priority affordability concerns and enhance revenues from are permanent residents, thus “burden” of the fixed price better of (second home) owners element is calculated on an average annual water › Seasonal Populations Demands consumption › Capital Recovery / Debt Service Asset Management and adequate Capital Reserves The Cost Accounting Guideline by ERRU shall Better relationship between the tariffs and the The financial model includes a cost of capital in its include cost of capital (for example WACC) in underlying cost structure for better demand calculation and this is also implicit in the tariff increases in line with good international practice in the management, and more fairly sharing the costs of the “policy scenario” cost calculation service delivery. Automatic indexing of a utility’s water tariff Water utilities to be more resilient to changes in This can be captured in the financial model by calculating the tied to changes in Consumer Price Index or energy prices tariff impact in a pre-model and raising the tariff accordingly. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 78 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Description of measure Expected impact Incorporation in the financial model electrical energy tariff or a combination of indices. Improvements in tariff setting – continued affordability Each utility must analyze their tariff Lifeline could address poverty and acceptability to pay Lifeline tariffs have not been included in the models “policy structures in particular with regard to a issues – But could also create issues in relation to scenario” currently. lifeline tariff. administration and revenue generation for utilities. As part of the analysis of lifeline tariffs each utility may analyze the consequences of introduction of Increasing Block Tariffs (as per Article 8 of the Tariff Setting Guideline) Improvement in tariff setting - industries Revise the 2011 tariff setting guideline to More effective operation of wastewater treatment At the moment, the financing model includes differential reflect discharge limits and a cost-based plants, less pollution sewerage tariffs by customer type. If the average industrial charge on biological pollution tariffs increases as a result of inclusion of a pollution component this will be reflected in the model including in its forecasts. Enhanced subsidy scheme operational If credible – this would lead to more efficient behavior Settlements of current arrears to the Power The financial model assumes that as of 2017 there is no distribution company and no further among (poorly run) utilities and to a reduction in the amnesty for non-payment by utilities. amnesties or subsidies. use of scarce resources (power and water) If credible – this would lead to more efficient behavior Enforcement of existing rules and regulations The financial model assumes that as of 2017 there is no to ensure that arrears do not reoccur among (poorly run) utilities and to a reduction in the amnesty for non-payment by utilities. use of scarce resources (power and water) Enhanced subsidy scheme pro-poor households Pro-poor house hold bill subsidy scheme Due to very low current tariffs, a pro poor subsidy The financial model includes a module that allows Option 1 scheme has primarily a political function. This is also assessment of the implications of Pro-poor household bill true at the tariffs proposed as part of the policy subsidy scheme Option 1 at utility level. The costs of this system is assessed to be less than 2 per cent of utility revenues. Pro-poor house hold bill subsidy scheme Due to very low current tariffs, a pro poor subsidy The financial model includes a module that allows scheme has primarily a political function. This is also assessment of the implications of Pro-poor household bill http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 79 Description of measure Expected impact Incorporation in the financial model Option 2 (Volume at international lifeline true at the tariffs proposed as part of the policy subsidy scheme Option 2 at utility level. The cost of this system is assessed to be less than ½ percent of utility level; Price at 50 per cent of affordability revenues level – only effective in utilities with tariffs at a certain level) http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 81 Appendix C References Council of Ministers (COM 2005): Council of Ministers Decision No. 177 dated 31 March 2005 “On effluent limits and zoning criteria of receiving water bodies aiming to prevent pollution of water bodies by hazardous substances” Council of Ministers (COM 2008): Council of Ministers Decision No. 23 dated 9 January 2008 “On the approval of water use tariffs as amended, sets forth water tariffs for a variety of uses. Dalhuisen et. al (2001): Price and income elasticities of residential water demand. Tinbergen Institute Discussion Paper TI2001-057/3. DANUBE WATER PROGRAM (2015): A State of the Sector. Water and Wastewater Services in the Danube Region. Vienna 2015. DG Regio (2014) Guide to Cost-Benefit Analysis of Investment Projects. Bruxelles December 2014 EBRD/DANCEE (2002): Water Prices in CEE and CIS countries. A toolkit for assessing willingness to pay, affordability and political acceptability. Copenhagen 2002. EBRD/DANCEE (2002a): Water Prices in CEE and CIS countries. Case studies. Copenhagen 2002. Espey. M et al (1997): Price elasticity of residential demand for water: A meta analysis In Water Resources Research Vol. 33 No. 6 pages 1369-74, June 1997 ERRU and GIZ Albania (2014): National study on non-revenue water in utilities in Albania. Tirana 2014 Farley, M (2008) The Manager_s Non-Revenue Water Handbook GIZ (2015): Energy Efficient Water Supply Systems, by GIZ Water Sector Reform Program, Tirana July 2015 Government of Albania (GOA 1996): Law 8102 of 28 March 1996 on the Regulatory Framework for Water Supply and Wastewater Disposal and Treatment Sector. Proclaimed with Decree 1467 of 18 April 1996. IC Consulenten (2013): Water Supply and Sewerage Master Plan for Albania. Vienna January 2013. IGR (2012): Preliminary Study for Investments in Rural Water Supply. Study Report, Final. INSTAT (2012): Albania Population and Housing Census 2011 - Main report http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 82 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES INSTAT (2015): Living Standard Measurement Survey 2012. See http://www.instat.gov.al/en/themes/living-standard.aspx (Accessed April 12, 2016) In addition the World Bank has provided access to the raw data set. GIZ Albania (2015): Energy Efficient Water Supply Systems: The challenges of moving from energy scans and cost benefit analyses to the planning, implementation and management of energy efficient infrastructure in water utilities in Albania. Tirana July 2015. Ministry of Public Works and Transport (2011): National strategy of water supply and sewerage 2011-2017. Official Journal No. 141 dated 17 October 2011 OECD (2010): Pricing Water Resources and Water and Sanitation Services. Paris March 2010 Water Regulatory Authority (WRA 2011): Tariff Setting Guideline. September 2011. World Bank (2011): The IBNet Water Supply and Sanitation Performance Blue Book by Caroline van den Berg and Alexander Danilenko. Washington D.C. 2011. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 83 Appendix D Calculation of coping costs D.1 Coping costs – Urban Calculation In the following, we have assessed the capital and operational cost of installing, assumptions maintaining and operating a rooftop tank and the variable costs related to purchase of bottled water. Rooftop tank It is typical that each household have their own tank and their own booster pump. For the purposes of calculation, we have assumed: › Standard water tank and pump as illustrated in Table 16 › Cost from standard supplier › Life time based on good engineering estimates in an urban Albanian setting › Operating costs for pump based on information from supplier and good engineering estimate for number of operational hours per year. › For the calculation of cost per m³ we have assumed an urban household size similar to the average for Albania (3.6 for urban) and a water consumption of 36 m³ per person per year. Table 16 Cost and life times of household water tanks and booster pump Capital costs Price in Lek Life time in Operating costs Description in Lek/m³ per unit years in Lek/m³ water water Water Tank 1,000 litres (stainless 30,000 15 15.4 (1) None steel) with installation Booster pump with installation for block apartments (6 floors = 18 45,000 10 1.9 (2) 23.2 (3) households) 2.2 kw Booster pump with installation for 10,000 10 7.7 (1) 57 (4) individual houses 0.3 kw Note: (1) Capital cost (LEK/m3) = Price in LEK per Unit / (Water Cons per Person per Year x Urban Household size x Life time) (2) Capital cost (LEK/m3) = Price in LEK per Unit / (Water Cons per Person per Year x Urban Household size x 18 x Life time) (3) Operating costs in LEK/m³ = (2.2 kW x 6 working hours /day (continuity of service) x 30 days x Energy price (11.4 LEK/kw)) / (Average water monthly consumption per person (36 m3/12) x Urban Household size x 18) (4)) Operating costs in LEK/m³ = (0.3 kW x 6 working hours /day (continuity of service) x 30 days x Energy price (11.4 LEK/kw)) / (Average water monthly consumption per person (36 m3/12) x Urban Household size) http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 84 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES The costs shown in Table 16 will be relevant for all urban dwellers in all Albanian municipalities, except those supplied by the four utilities that today provide water 24/7. Purchased bottled For families that do not believe that the water is good for drinking, we assume water that our “standard family” of 3.6 members buys 3 bottles (one bottle is 6 liters of drinking water) per week. A month has 4.33 weeks on average. Table 17 Cost of household purchases of bottled water t Description Price per 6 Monthly Monthly cost Equivalent family Coping costs liter bottle consumption purchase of utility calculated as water Lek/m³ utility water Bottled 80 Lek 13 bottles 1,040 Lek 10.8m³ per month1 96 Lek/m³ water (78 liters) Note: 1 Assuming 100 lcd per day and 30 days per month in our family We assume that only the 25 per cent of consumers that do not perceive the water to be good for drinking will buy bottled water as a coping strategy. In summary, we may illustrate the coping costs for individual urban households. Table 18 Coping Cost for urban households Id Household Type Coping strategy Cost in Lek Total annual cost per m³ water1 in Lek per capita / household2 1 Urban perceive water not good for Buying bottled water 96 3,467 / 12,480 drinking 2 Urban single family dwelling Water tank and pumping 70 2,520 / 9,072 3 Urban multi family dwelling Water tank and pumping 40 1,440 / 5,184 4 Single family dwelling using bottled Water tank + bottled 166 5,987 / 21,552 water (1) + (2) water 5 Multi-family dwelling using bottled Water tank + bottled 136 4,907 / 17,664 water (1) + (3) water Note: 1 Here the annual coping cost have been recalculated to the equivalent price for each m³ water purchased from the utility 2 Calculated on the basis of unit costs in Table 16. We assume a consumption of 3 m³ per person per month and household sizes as in Table 12. For bottled water, we have assumed a monthly consumption of 78 liters per household (equivalent to less than 1 liter per family member per day). D.2 Coping costs - Rural Borehole and hand It is typical that households that have to rely on boreholes have access to a pump borehole in the close vicinity. For the purposes of calculation, we have assumed: › Manual pump –operational costs are limited to maintenance http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 85 › Borehole in close vicinity to house – we ignore time spent to fetch water as this is limited › Cost of hand pump from standard supplier. › Cost of borehole from standard supplier. Drilling depth is 40 meter. We use a standard cost of 300,000 LEK per borehole (using a standard distance from service provider thus ignoring that cost will vary with location). › Life time based on good engineering estimates in a rural Albanian setting › For the calculation of cost per m³ we have assumed a household size as per the average for Albania (6.0 for rural) and a water consumption of 36 m³ per person per year. Table 19 Cost and life times of borehole and hand pump Description Price in LEK per Life time in years Capital costs in Operating costs in unit LEK/m³ water LEK/m³ water Borehole (40 meter) 300,000 30 46.3 (1) None Hand pump 14,000 10 6.5 (1) Limited Note: (1) Capital cost (LEK/m ) = Price in LEK per Unit / (Water Cons per Person per Year x Rural Household 3 size x Life time) For families that do not believe that the water is good for drinking, we assume that our “standard rural family” of 4.6 members boils 4 litres of water per day. Table 20 Cost of household purchases of bottled water Description kWh per Price of power Monthly Monthly Equivalent Coping costs litre in Lek per consumption cost family purchase calculated as boiled kWh of utility water Lek/m³ utility water Boiled 13.8m³ per 0.05 10 120 litres 60 Lek 4.35 Lek/m³ water month1 Note: 1 The coping costs are equivalent to boiling less than four liters of water per day per household. A fairly efficient kettle may use 0.2 kWh to boil four liters. At 10 lek per kWh, this is equivalent to 2 lek per day or 60 lek per month per household. In summary, we may illustrate the coping costs for individual rural households. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 86 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Table 21 Coping Cost for urban households Id Household Type Coping strategy Cost in Lek Total annual cost per m³ water1 in Lek per capita / household2 1 Rural perceive water not good for Boiling their water ~4 157 / 720 drinking 2 Rural family with well and hand pump Well and pump 53 1,908 / 8,777 3 Rural family dwelling boiling water (1) Water tank + 57 2,052 / 9,439 + (2) boiled water Note: 1 Here the annual coping cost have been recalculated to the equivalent price for each m³ water purchased from the utility. 2 Calculated on the basis of unit costs in Table 16. We assume a consumption of 3 m³ per person per month and household sizes as in Table 12. For bottled water, we have assumed a monthly consumption of 78 litres per household (equivalent to less than 1 liter per family member per day) D.3 Total coping costs Annual private Using these data for coping cost, as well as data for total water sales as well as coping costs are in assumptions about how coping strategies, in particular if to include buying the 15 – 25 million bottled water as a strategy one may calculate the total annual coping costs for EUR range households in Albania to be in the 2.5 billion lek to 3.5 billion lek (or 15 to 25 million EUR) range. This is in the same range as the annual budget contribution to the WSS sector. Calculation steps The steps in the calculation are illustrated in Table 13. It can be seen that the annual coping costs for Albanian households is more than 5.3 billion lek. This amount constitutes more than half of what is being invested in the sector each year. Table 22 Illustration of the calculation of coping cost Id Text Urban household w Urban Rural Total piped water household household multi- single no No Piped family family coverage coverage water dwelling dwelling 1 Share of total population in 36.71 % 12.24 % 6.05% 28.80 % 16.20% 100 % per cent1 2 Water sold in million m³ 2 50.558 16.853 NA NA 22.309 89.720 3 Primary coping strategy Water tank and Borehole and hand None NA pumping pump 4 Cost of primary coping strategy in Lek per m³ 40 70 53 53 NA NA utility water sold3 5 Share of people who do not believe that utility water is 20 % 20 % NA NA 20 % NA drinkable in per cent4 http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 87 Id Text Urban household w Urban Rural Total piped water household household multi- single no No Piped family family coverage coverage water dwelling dwelling 6 Secondary coping strategy5 Boil Buy bottled water NA NA NA water 7 Cost of secondary coping strategy in Lek per m³ 96 96 NA NA 4 NA utility water sold3 8 Total cost for all households applying only 2,022 1,180 325 866 NA 4,393 primary coping strategy in mill Lek 9 Total cost for all households applying both 2,654 1,391 325 866 89 5,322 primary and secondary coping strategy in mill Lek Note: 1 Urban households constitute 55% of total population, rural constitute 45 % of total according to the Census. Coverage rates are 89% for urban and 36% for rural respectively. We assume that three quarters of the rural population live in multi-family dwellings. In this way, we calculate the shares of population in each group 2 90 million m³ per year is the total sale to households according to data from the benchmarking unit. The distribution by family types has been done using the share of total population by family group. This is not fully correct. First, the total sales do not include sales outside jurisdictional areas and is thus probably underestimated. Second, urban coverage is higher than rural coverage, thus our calculation tends to underestimate sales in urban areas, while the net sign (over or under estimate) for rural areas cannot be determined a priori. 3 See tables above 4 This data is from LSMS (2012) 5 Consultants assumptions Sources: Data from LSMS on population, consultants estimates for coping strategies, share of people coping and costs, water sold from Benchmarking unit. These coping costs can be avoided by consumers who are supplied water of good drinking quality on a continuous basis by their water utility. They thus represent a potential that could be converted into a willingness to pay for better service. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx 88 WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES Appendix E Brief description of current tariff setting Tariff setting is regulated by Law 8102 of 28 March 1996 “On the Regulatory Framework of the Water Supply and Wastewater Disposal and Treatment Sector”. This is a brief framework law that stipulates: › That the Council of Ministers approves national policies and strategies for the sector (Article 12) › The Water Regulatory Authority (WRA) licenses and regulates licensees with a view to promote competition and protect consumer interests with respect to (Article 13): › Prices, tariffs and other service conditions; › Quality, efficiency, continuity and safety of service › The approved licensees may (Article 17) › Collect and treat water in its plants › Distribute water for public consumption › Dispose and treat wastewater. In other words, the Law provides for a three way split of responsibilities in line with current good international practice30. The Law (Articles 21 and 22) establishes the principles of tariffs and the tariff setting procedure. In 2008, the Council of Ministers issued a decision (COM 2008) which stipulates the abstraction fees. It is a volumetric fee. The fee to be paid depends on the type of user and on whether the source is ground or surface water. Ground water is generally more expensive. The charge ranges from 1.1 ALL/m³ for families not connected to a public system to 40 ALL/m³ for thermal baths for ground water. Water utilities pay approx. 0.1 ALL/m³ for ground water and 0.05 ALL/m³ for surface water. Power producers pay one per cent of their revenues from production of power. This water abstraction fee seems designed primarily to secure some revenues from power companies and to provide an incentive for commercial entities to connect to public systems where available. The fees charged to public utilities are very low (less than 0.0001 EUR per m³) and do not send any scarcity signal. 30 Although according to article 13 the Regulatory Authority participates as an advisor in drafting strategies and policies. A system where this is the responsibility of a competent Ministry and not the regulator would provide for a more clear-cut distribution of responsibilities. We may assume that the wording of the Law reflects scarcity of sector specific knowledge and competence in the Central Government administration. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx WATER FOR PEOPLE FINANCIAL POLICY AND IMPLEMENTATION MEASURES 89 On the other hand, water scarcity in Albania is a local phenomenon and raw water pricing may not be a very appropriate instrument to address the issue. The WRA has issued a Tariff Setting Guideline in 2011 with GIZ support that details the principles of tariff setting and the tariff setting procedure that will be followed by the WRA. http://projects.cowiportal.com/ps/A076585/Documents/Externals/03 Project documents/Delivered to client - DO NOT UPDATE/Deliverable 4 final report/A076585 Albania WSS FS Policy and Strategy ver 2016 11 20 clean.docx