EX POST EVALUATION OF INVESTMENT PROJECTS CO-FINANCED BY THE EUROPEAN REGIONAL DEVELOPMENT FUND (ERDF) OR COHESION FUND (CF) IN THE PERIOD 1994-1999

WATER SUPPLY IN PALERMO

PREPARED BY: CSIL, CENTRE FOR INDUSTRIAL STUDIES, MILAN

PREPARED FOR: EUROPEAN COMMISSION DIRECTORATE-GENERAL REGIONAL POLICY POLICY DEVELOPMENT EVALUATION

MILAN, SEPTEMBER 5, 2012

This study is carried out by a team selected by the Evaluation Unit, DG Regional Policy, European Commission, through a call for tenders by open procedure no 2010.CE.16.B.AT.036.

The consortium selected comprises CSIL – Centre for Industrial Studies (lead partner – Milan) and DKM Economic Consultants (Dublin).

The Core Team comprises: - Scientific Director: Massimo Florio, CSIL and University of Milan; - Project Coordinators: Silvia Vignetti and Julie Pellegrin, CSIL; - External experts: Ginés de Rus (University of Las Palmas, Spain), Per-Olov Johansson (Stockholm School of Economics, Sweden) and Eduardo Ley (World Bank, Washington, D.C.); - Senior experts: Ugo Finzi, Mario Genco, Annette Hughes and Marcello Martinez; - Task managers: John Lawlor, Julie Pellegrin and Davide Sartori; - Project analysts: Emanuela Sirtori, Gelsomina Catalano and Rory Mc Monagle.

A network of country experts provides the geographical coverage for the field analysis: Roland Blomeyer, Fernando Santos (Blomeyer and Sanz – Guadalajara), Andrea Moroni (CSIL – Milano), Antonis Moussios, Panos Liveris (Eurotec - Thessaloniki), Marta Sánchez-Borràs, Mateu Turró (CENIT – Barcelona), Ernestine Woelger (DKM – Dublin).

The authors of this report are Gelsomina Catalano, Mario Genco and Silvia Vignetti of CSIL.

The authors are grateful for the very helpful comments from the EC staff and particularly to Veronica Gaffey, Anna Burylo and Kai Stryczynski. They also express their gratitude to all stakeholders who agreed to respond to the team’s questions and contributed to the realisation of the case study. The authors are responsible for any remaining errors or omissions. Quotation is authorised as long as the source is acknowledged.

Cover: Fontana Pretoria, picture by Bernhard J. Scheuvens (April, 2007).

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 1

1 PROJECT DESCRIPTION...... 9

1.1 CONTEXT...... 9 1.2 ITALIAN LEGAL FRAMEWORK IN THE FIELD OF WATER SUPPLY...... 11 1.3 STRUCTURAL FEATURES AND SERVICE DELIVERED ...... 14 1.4 CURRENT PERFORMANCE...... 18 2 ORIGIN AND HISTORY ...... 23

2.1 BACKGROUND ...... 23 2.2 FINANCING DECISION ...... 25 2.3 PROJECT IMPLEMENTATION AND ADDITIONAL INVESTMENT NEEDS ...... 30 3 LONG-TERM DEVELOPMENT EFFECTS ...... 33

3.1 KEY FINDINGS...... 33 3.2 DIRECT WELFARE AND ECONOMIC GROWTH...... 36 3.3 ENDOGENOUS DYNAMICS ...... 38 3.4 INSTITUTIONAL QUALITY ...... 40 3.5 ENVIRONMENTAL EFFECTS ...... 40 3.6 TERRITORIAL AND SOCIAL COHESION ...... 42 3.7 SOCIAL HAPPINESS...... 42 4 DETERMINANTS OF PROJECT OUTCOMES...... 45

4.1 KEY FINDINGS...... 45 4.2 PROJECT DESIGN AND FORECASTING CAPACITY ...... 46 4.3 PROJECT GOVERNANCE...... 48 5 CONCLUSIONS...... 57

ANNEX I. METHODOLOGY OF EVALUATION...... 59

ANNEX II. COST-BENEFIT ANALYSIS ...... 65

ANNEX III. MAP OF STAKEHOLDERS ...... 95

ANNEX IV. LIST OF INTERVIEWEES...... 97

ANNEX V. REFERENCES ...... 99

LIST OF ABBREVIATIONS

AMAP Azienda Municipalizzata Acquedotto Palermo (Municipal Company Palermo Aqueduct)

ANCI Associazione Nazionale Comuni Italiani (National Association of Italian Municipalities)

AOTA Authority of Optimal Territorial Ambit

APS Acque Potabili Siciliane s.p.a. (administrator of IWS in the remainder of OTA 1 in Palermo)

CBA Cost-Benefit Analysis

CF Cohesion Fund

CIPE Comitato Interministeriale per la Programmazione Economica (Inter-Ministerial Committee for Economic Planning)

CSF Community Strategic Framework

DG Regio Directorate General for Regional Policy

EC European Commission

ECU European Current Unit

EIB European Investment Bank

ERDF European Regional Development Fund

ESF European Social Fund

EU European Union

GDP Gross Domestic Product

HDPE High Density Polyethylene

IMF International Monetary Fund

IWS Integrated Water Service

NUTS Nomenclature of Territorial Statistical Units

OTA Optimal Territorial Ambit

PPP Public-Private Partnership

PRGA Piano Regolatore Generale degli Acquedotti (Aqueduct General Plan)

R.A.C.T. Regional Administrative Technical Committee

SCF Standard Conversion Factor

TOP Three-year operational plan

WTA Willingness to accept

WTP Willingness to pay

EXECUTIVE SUMMARY

The present case study appraises an infrastructure project aimed at renovating the water distribution network in the city of Palermo, in the Italian region of Sicily. After almost ten years of project implementation the aim of the present ex-post evaluation is to establish the extent to which this infrastructure project has affected the lives of the inhabitants of Palermo and what long-term effects it has produced. The analysis draws from an ex-post Cost-Benefit Analysis - CBA1 and from a set of qualitative evidence, both secondary (technical reports, official reports, press articles, books and research papers) and primary evidence (15 interviews with key stakeholders and experts were carried out in the period September-October 20112). The overall approach and methodology followed in the project is briefly recounted in the underneath Box and, more extensively, in Annex I.

OVERALL APPROACH AND METHODOLOGY The Conceptual Framework developed in the First Intermediate Report has been developed starting from the evaluation questions included in the ToRs3, and further specified and organised as per the team’s understanding. In particular, the Team identified three relevant dimensions of analysis: a. The object of the evaluation (the ‘WHAT’): this relates to the typologies of long-term contributions which can be observed. Starting with the typologies identified in the ToR (socio-economic development and quality of life) the Team developed the following classification of long-term effects: ‘Economic development’ (including effects on GDP growth and endogenous dynamics) and ‘Quality of life’, synonymous with additional social wellbeing, i.e. including effects that are not captured by the economic variables. ‘Quality of life’, in turn, has been divided into: social cohesion, territorial cohesion, institutional learning, environmental effects and social happiness. b. The timing of the long-term effects (the ‘WHEN’): this dimension relates to the points in the project’s lifetime at which the effects materialise for the first time (short-term dimension) and stabilise (long-term dimension). The proper timing of an evaluation and the role it can have in relation to the project’s implementation is also discussed here. c. The determinants of the project’s performance (the ‘HOW’): the assumption here is that five aspects of the project’s implementation and their interplay are crucial for the project’s final performance. These aspects are: project design, forecasting capacity, governance, context and managerial response. Five Working Hypotheses are related to these dimensions and explain how each of them can influence the generation of the project’s short or long-term effects. On the basis of this conceptualisation, a set of evaluation questions was developed and aims to guide the entire study and to support the provision of conclusions and recommendations. The methodology developed to address the evaluation questions consists of a combination of quantitative (Cost Benefit Analysis) and qualitative (interviews, surveys, searching in governments and newspapers’ archives, etc.) techniques, integrated in such a way as to produce ten project histories. CBA is an appropriate analytical approach for the ex-post evaluation because it can provide quantification or indications about some of the long-term effects produced by the project. However, the most important contribution of the CBA exercise is to provide a framework of analysis to disentangle the most crucial

1 Data, hypotheses and results are discussed in Annex II. 2 See Annex III for a list of interviewees. 3 They are the following: What kind of long-term contributions can be identified for different types of investment in the field of environment and transport infrastructure? How are these long-term contributions generated for different types of investment in the field of environment and transport infrastructure, i.e., what is the causal chain between certain short-term socio-economic returns and long-term returns from investment? What is the minimum and average time needed for a given long-term contribution to materialise and stabilise? What are these time spans for different types of investment in the field of environment and transport infrastructure? What are the existing evaluation methods to capture a given long-term contribution for different types of investment in the field of environment and transport infrastructure?

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aspects of the projects’ ex-post performance and final outcome. Qualitative analysis is on the other hand addressed more to understanding the underlining causes and courses of action of the delivery process. On the basis of the findings provided by the ten case studies, the Final Report will draw lessons along the key dimensions identified of ‘what’, ‘when’ and ‘how’. Source: Authors

The aqueduct of the Municipality of Palermo is a striking piece of infrastructure built at the end of the XIX century to serve the historical central districts of the city4. During the urban expansion experienced by the city in the 1950s and 1960s additional sections of the water distribution network were built, in response to the needs of a booming population, in the absence of a systematic and strategic plan.

At the beginning of the 1980s the entire water system infrastructure was in a state of obsolescence. Moreover, the public company in charge of the service delivery had poor internal technical capacity and lacked a strong strategic vision, due also to a political context influenced by corruption and organised crime. As a consequence, the citizens of Palermo suffered from severe water shortages, and the water was rationed during the day and the week in order both to more effectively use the limited available water and to reduce water losses, by shortening the periods of time during which the networks were kept under pressure (even though this parameter was set at a very low level). Citizens coped with this shortage by collecting water in domestic tanks operated with electric pumps in order to compensate for the low service pressure.

After serious episodes of drought at the end of the 1970s, the municipal company (AMAP - Azienda Municipalizzata Acquedotto di Palermo) engaged a group of experts to draft a study to identify a long term solution to the problem. In contrast to the common perception that water shortages were due to the scarcity of water sources and dry weather, the study correctly identified heavy losses in the obsolete distribution network as the main source of inefficiency in the system. It was however only at the beginning of the 1990s that a Master Plan was prepared based on the findings in that study. The result was an ambitious and highly demanding (in terms of financial resources as well as time and technical capacity) plan for the complete restructuring of the entire system. However, some of the technical details and solutions identified were controversial. In particular, water demand was overestimated (assuming population increase while it was actually decreasing at the time), leading to overcapacity in the pipes and supply system design.

It was thanks to the funds available through the EU 1994-1999 programming period that project implementation gained momentum. Due to funds availability and administrative reasons related to the readiness of the projects, only some components of the Master Plan were selected for implementation, namely the renovation of the oldest three sub-networks of

4 The whole system - originally consisting of a canal, over 67 km long (the old Scillato aqueduct, still in operation), two masonry tanks on the San Ciro site, and the water system of the town centre at that time (length ≈ 80 Km’s) - was built in only three years through project financing, one of the oldest examples of this kind of PPP in Italy. The concession for the operation of the aqueduct and of the water service in Palermo for sixty years was signed on February 12th, 1898 between the Municipality, which co-financed the investment with 30% of the capital cost, and the company which won the tender, namely the Scillato Water Company (Società Acqua di Scillato) of the Biglia brothers and Vanni.

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the distribution network, located in the historical centre. Soon after, thanks to additional funds availability, three additional sub-networks plus the completion of the city bypass to facilitate water distribution in the north-west district, plus a system of automatic supervision and remote control of the water, were also financed.

The construction phase started in 1997 and the initially planned works were completed by 2004. The first section that was completed started to operate in 2002. In order to cover the investment of EUR 110 million5, the Municipality of Palermo benefitted from co-financing of the European Regional Development Fund (ERDF) for a total of EUR 44 million (40% of the total investment). In addition, other EUR 44 million were provided from the Italian State. Since the EU required the municipal company (AMAP) to co-finance at least 20% of the total cost of the projects in accordance with a project financing scheme, an EIB loan was applied for by AMAP. After the project’s independent appraisal, the EIB approved the loan conditional on the addition of a metering system to the planned investment.

The works were implemented practically on time and with cost savings, thanks to further adjustments during the design phase and cost reductions at the tendering stage. Part of the additional resources made available by the EIB and saved on the investment costs were used by AMAP for additional investments undertaken by the municipal company to provide new connections for users6, which improved the metering system and had the side-effect of identifying illegal connections to the old network.

In total, the past investment costs considered in the analysis amount to EUR 120 million and the co-financing share of each source of financing is recorded in the following Table. The project has proven to be financially sustainable, as revenues have been able to cover costs for each year since 1997,7 and a similar sustainability pattern is expected in the future.

OVERVIEW OF INVESTMENT COSTS AND SOURCES OF FINANCING Financing period 1997-2011 First year of operation 2002 Total investment costs (2011 prices) EUR 120 million 100% Sources of financing and co-funding rates over the total investment costs Cohesion Fund EUR 0 0% European Regional Development Fund EUR 44 million 37% European Investment Bank EUR 22 million 18% National-regional-local public contribution EUR 54 million 45% Private capital EUR 0 0%

Evidence available from the interviews and documents collected supports the assessment of a strong improvement in the quality of life of citizens brought about by the implementation of

5 Unless otherwise specified, this and all the following cash quantities are expressed in constant 2011 prices. 6 Originally not planned in the projects on the sub-networks. 7 The cumulated net cash flows criterion in the EC Guide defines a project as financially sustainable if there is no year in which cumulated costs outweighs revenues (EU Commission, 2008).

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the project. In particular, 450 km of new pipes, made of High Density Polyethylene (with an innovative technology implemented for the first time in Italy for a water distribution system) completely eliminated the problem of physical losses in the six sub-networks, serving about 60% of the total municipal population. Although water losses were still severe in the old part of the network, it was decided to use the water savings in the restored section of the network to allow for a continuous water supply, thus eliminating water supply disruptions in almost all the network (in about 25% of the network water is still rationed because the pipes are so obsolete that they could not cope with a continuous supply without a serious increase in pipe bursts and other associated problems). The more efficient distribution was actually used to provide a more reliable water service to the population rather than reducing water losses, making it possible for the already available water supply to cope with existing demand. It is worth noting in fact that neither the total water volume available nor the per capita water consumption changed as a result of the project. As a result of the more reliable service the number of complaints by citizens dramatically dropped after the project’s implementation.

The more reliable and effective water supply in the entire city has direct welfare and economic growth effects in terms of avoided costs for the large share of the population benefitting from the continuous water supply, as compared to the situation before the project. This effect has been estimated in the CBA via the avoided costs of maintaining and operating the electric pumps to obtain water during the rationing, avoided time invested by private and commercial users in managing water storage and operating the pumps as well as in avoided maintenance costs for domestic appliances or electrical devices making use of water (e.g. washing machines). The discounted value of these social benefits amounts to about EUR 407 Million (2011 prices). Another direct growth effect for commercial and industrial users is improved productivity due to a more reliable water supply. This is however not quantified but only described in qualitative terms.

Additional effects are recorded. First, the municipal company achieved more efficient management of the distribution system, in terms of operational and maintenance costs, with effects in terms of efficiency and growth. It was no longer necessary to invest resources in complex daily manoeuvres to operate the water network by shifts (i.e. supply-side operated network) and in repairing frequent breaks or disruptions in the pipes and other faults. This amounted to a saving of EUR 1.5 million on average per year, included in the CBA calculations.

The saved resources were partially invested in other management activities, in particular in additional research related to the problem of water metering. A side effect of the project’s implementation is in fact an improvement in the knowledge base and quality of the management of the municipal company (endogenous dynamics) following a shift from a supply-driven to a demand-driven delivery service, focused on providing the water actually demanded according to the users’ preferences, rather than pumping water into the system according to technical feasibility. This shift, together with the adoption of the new metering system, independent for each single sub-network, fostered the need to develop a more reliable and accurate account of water metering. This was achieved also via a number of innovative research studies in the field of water metering and investments in new user

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connections. Results in this respect relate to a better understanding of the causes and the amount of water losses, a decrease in the so-called administrative losses (due to metering weaknesses rather than physical losses in the pipes) and a decrease in unpaid bills. This effect was not quantified but only qualitatively described.

A minor long-term effect produced by the project implementation was a slight improvement in water quality, again a side effect of the improvement in distribution efficiency. The improvement in water quality is the result of a decrease in the risk of contamination events rather than improvement in the physical-chemical profile of the water. As a matter of fact, water quality was good even before the project and the project’s implementation did not affect this aspect (natural sources and water purification treatments have not been modified by the project).

Additional interventions realised later and independently from the initial project, addressing the adduction system and mainly aimed at coping with periods of drought, improved the available quantity of water from natural sources to be pumped in the system and contributed to mitigating the water loss problem.

The project’s long term effects were felt at the local level only and the main beneficiaries were the citizens and the municipal company. The most relevant effects (more reliable water supply and operational cost savings) materialised soon after the project’s implementation (four years after the project’s start), while side effects (knowledge improvement) only arose later on.

Although the overall final assessment of the project’s performance is positive, and the CBA provides a positive economic net present value supporting this finding (EUR 315 million at 2011 prices)8, it should be also noted that, not only were a number of potential benefits not achieved, but additional investments foreseen and not implemented are at the origin of pending problems in the delivery and management of the water service. For a complete restructuring of the water system some additional interventions would have been necessary, such as a new water tank and the renovation of the rest of the sub-networks via the complete replacement of the old sub-networks which are obsolete and in particularly poor condition, a careful maintenance system, a shift to an asset management approach to service delivery (i.e. long-term planning of the best mix of capital and operating expenses according to principles of optimal resource allocation) and the revision and rationalization of the internal mains supplying the new sub-networks.

The most striking effect of the failure to complete the plan is that water losses in the network still amount to 47% of the total supplied water, since the water savings in the restored sections are counterbalanced by an increase in water losses in the obsolete sections which are now continuously supplied (therefore water can now leak from the network 24 hours per day every day, rather than only during the times when water was being supplied). Moreover, the supply system of the new sub-networks remains the old, sub-optimal, one: for example a forecasted new water tank was not realised and this leaves one of the main sub-networks with unsuitable

8 The Economic rate of return of the project is equal to 14.68%.

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values in the technical parameters for water pressures which cause underperformance of the entire sub-network. Pressures problems are recorded in some of the new sub-networks and tanks and electric pumps are still in use in some of the highest buildings to raise water to the top floors.

Some of the current water pressure and low speed problems are also related to a forecasting error in the design phase. The entire system suffers from overcapacity since the demand forecast was significantly overestimated. A long term strategy of interventions prepared in the same years of the project implementation was actually addressing these problems with the revisions of the planned interventions, and design of new, more suitable, ones, according to more realistic demand forecasts.

The best solution to the remaining problems related to water losses and pressure can be addressed by restructuring the remaining sections of the urban network. To this end, a new design needs to be developed with updated demand forecasts, since the original Master Plan suffers from the above-mentioned forecasting errors and its implementation today would lead to overcapacity in the system. Moreover, it would be advisable for the new plan to address technical specificities with up-to-date and innovative solutions, tailored to the current situation of the water network. The scientific discipline of water losses control is in fact fast developing and requires high profile and up-to-date technical expertise.

The key determinant of project performance is project governance, which positively affected the project in the start-up phase but subsequently proved to be the impeding factor in the continuation of the entire renovation strategy. It was a positive combination of political will and technical and managerial capacity that facilitated in the initial phase, in such a short period of time and with such an advanced and efficient implementing capacity, project approval, and implementation. After many years during which the water supply in Palermo was affected by the influence of organised crime and a policy of clientelism in the selection of public managers, leading to a management approach far from the pursuit of the public interest, a cultural and political renovation, the so-called Spring of Palermo, saw a top level management board of the municipal company being selected and empowered to deal with the deeply rooted problem of water shortages. The water supply project was only the first step in a more far-reaching long-term strategy of innovation and capacity improvement in the public company, pursuing managerial and technical advancement underpinned by a new company vision, implemented by the new management board.

With a pragmatic strategic view and the technical strength of a highly qualified team of experts, the project provided the correct and prompt solution to an urgent and relevant need of the population, overcoming some weaknesses in the project design and forecasts (such as for example the planned overcapacity stemming from demand overestimation). The taskforce in charge of project implementation not only provided a high standard of technical input, but was also able to establish fruitful professional relationships with the national authorities in charge of funds management and with the financing institutions (EU and EIB). In particular, the Italian desk of the EIB provided not only the funding but also technical support at the design phase, by requiring an additional component (i.e. the water metering system) for which

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additional funds were also provided. As regards the European Commission, it played the role of funds provider with no additional input either in the planning or during the implementation phase.

However, after the first interventions were successfully implemented, this ambitious innovative strategy was discontinued. The reasons for this stem from a number of events, including institutional conflicts and impasses in the implementation at regional level of national reform of the water supply system. Change in the management board of the municipal company definitively brought a halt to the ‘magic moment’ of this restructuring process. Political impasse and managerial limitations were the cause of the failure to continue proper and comprehensive implementation of the remaining components of the original design.

The adoption of a more strategic and comprehensive approach by the Commission would have been beneficial to the completion of the water network development plan, including the components already planned and never implemented. In this light the Commission could have urged the municipality and AMAP to complete the modernization of the water network within the framework of the following programming periods by removing all the obstacles that prevented the already planned interventions from being realized. Such pressure from an external player could have been critical in overcoming impasses in the governance structure. According to some interviewees, the EC, during the years of project’s implementation, was actually in the position, by a modest amount of moral suasion, to push the consistency of the strategic planning and the allocation of the Structural Funds. For example, within the first three years Operational Plan approved by the Authority of the pertinent Optimal Territorial Ambit9 an allocation of EUR 13 million10 (funded with a mix of sources, including the EU funds11) was foreseen with the aim to undertake some remaining necessary investments in the Palermo network. Such investments were actually never implemented.

The overall project implementation suggests two relevant lessons that are worth to be underlined. First, technical competence and managerial capacity have proven to be crucial in order to implement the project both on time and without cost overruns. Indeed, the governance aspect – deeply related to political issues – can be rightfully considered a key necessary condition for the Palermo water supply system’s success.

A further lesson that can be drawn from this case-study concerns the importance that the institutional context and legislative framework have in creating a favourable context, by clearly setting out responsibilities and providing incentives for committing to long term investment plans. The EC could play a role in this respect. Even if so far most of the Commission’s efforts have been put during the initial phase of the project’s financial assessment, giving little relevance to the subsequent design and operational phases, systematic follow-up activities,

9 The service provided by AMAP S.p.A. is part of the Integrated Water Service organization of the Optimal Territorial Ambit 1 of Palermo. 10 2011 prices. 11 Since the 2000-2006 programming period, financing of investments in the water sector in Sicily has been ruled by Framework Programme Agreements, using in an integrated way both the ERDF and the various national funds.

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the provision of financial funds conditional on a longer-term planning and a stronger supply of technical expertise would be highly advisable in the future years for facilitating the overall reconstruction process.

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1 PROJECT DESCRIPTION

This section provides a brief description of the Municipality of Palermo and its socio-economic context. The key structural features of the infrastructures and the service delivered, the context in which it takes place, the target population and the current performance of the project are outlined, in order to give a general description of the project which is the subject of this case study.

1.1 CONTEXT Palermo is a city in Southern Italy and is the capital of the autonomous region of Sicily, the largest Italian island. Palermo is located in the northwest of the region and stretches from a bay between two promontories inland on a plain known as “Conca d’oro” (“Golden Valley”).

The territory surrounding Palermo consists mainly of hills and mountains, which consist of rocks of dolomite (calcium and magnesium carbonate). Short plains stretch along the main water courses. These often swell in winter and run dry in summer.

Figure 1.1 THE GEOGRAPHICAL POSITION OF THE MUNICIPALITY OF PALERMO

Source: Authors

The city of Palermo is an ancient centre in the Mediterranean Sea with a rich history of domination by different groups, layered and still visible in the city outline12. The period under the Arabs, in the 9th century, saw the first important blossoming of the city, which became an important Arab centre in the Mediterranean. Under the subsequent domination of the Normans, magnificent buildings and artistic works were built, and the city prospered culturally

12 The first historical records indicate Palermo as a town founded by the Phoenicians, often in conflict with the neighboring cities of the Magna Graecia (Himera, Syracuse) and, a few centuries later, heavily involved in the Punic wars against Rome.

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and economically. After the Angevins and the Spanish, during the 1700s Palermo was under the Bourbons, who enriched the city with baroque buildings. The following century the city was open to trade and relations with Europe. From the late 1800s to the early 1900s, thanks to a new wave of entrepreneurship, the city experienced a period of economic and cultural renewal.

The service sector is currently the most developed one. In particular, the greatest number of economic activities is recorded in the wholesale and retail trades. In the industrial sector construction plays a dominant role.

In the current year the city has 655,875 residents but this reflects a long and slow process of demographic decline that started at the beginning of the 1980s. The population decline of the last ten years is linked to the emigration of young people toward the North of Italy in search of employment and to the population’s displacement to the neighbouring towns, especially the coastal ones. The negative trend is probably softened by the constant inflow of foreigners to the whole region and to Palermo.

Figure 1.2 DEMOGRAPHIC TREND IN PALERMO, CONVERGENCE REGIONS AND ITALY, YEARLY PERCENTAGE CHANGE. 1982-2011

Source: Authors’ elaboration based on Eurostat data

The “Survey on perception of quality of life” conducted by the European Union13, reveals a general feeling of dissatisfaction among the population of Palermo. Job opportunities are the most important problem in the city. The province of Palermo registers one of the highest levels of unemployment (18.7%) among all the Italian provinces. Moreover, there is a high level of distrust related to public expenditure: 54% of citizens think that the city does not spend resources in a responsible way.

13 European Commission, March 2010, Survey on Perception of quality of life in 75 European cities, DG Regio, Policy development, Urban development, territorial cohesion, Brussels.

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Another Survey provided by the Italian national institute Demopolis14 on the quality of life and public services in Palermo, in 2008, not only supports the European Survey but highlights further critical aspects in the municipality. According to the report, the citizens of Palermo are dissatisfied with public services and family life conditions, and they are very critical of the local public administration. Youth unemployment, economic crisis and the cost of living, urban insecurity (the latter was not highlighted in the EU Survey) and lack of social services represent the main problems for citizens. The majority of citizens think that the quality of life is not acceptable in the city; according to 42% of those interviewed, quality of life has not changed in the last five years, while 32% think that it has worsened. The majority declare that among the major structural problems in the city are road traffic, the absence of adequate parking spaces, and urban waste. However, two-thirds of citizens are overall satisfied with water distribution.

Recent data collected in the framework of the Italian performance reserve15, which for the period 2007-2013 set targets for a number of indicators related to services of general interest, indicates that the performance of Sicily in water distribution slightly improved in the period 2005-2008, performing better than the Southern Italy average. By contrast, a lower than average performance was recorded for the indicator on the number of users served by purification systems16.

In Palermo the level of insecurity perceived by its citizens is very high. According to the survey on the level of safety in urban municipalities, carried out by ANCI17, it is the second most unsafe Italian municipality, after Naples, in the perception of its citizens. Juvenile and organized crime are the most relevant sources of social insecurity. According to a recent report on the impact of the Mafia on the economic, social and institutional conditions in the Italian Southern regions18, Sicily is the region with the highest number of municipalities affected by the Mafia and, more specifically, the province of Palermo is one of the most affected among the nine provinces on the island19.

1.2 ITALIAN LEGAL FRAMEWORK IN THE FIELD OF WATER SUPPLY The Italian regulation concerning water resources and water service has been long fragmented with an overlapping of different laws and acts. The law 36/94 on water resources, better known as the “Galli” Law20, represents the first attempt to solve this excessive fragmentation. The first substantial innovation introduced by the law relates to the consolidation of water services (both water supply and waste water treatment) into larger management entities, the so called Integrated Water Services (IWS). The IWS consists of the whole of the public services of withdrawal, conveyance and distribution of water for civil uses, of sewage and wastewater

14 Demopolis, 2008, Palermo, città possible? Servizi e qualità della vita nel capoluogo siciliano, available at: http://www.demopolis.it/newsfocussicilia.php?subaction=showfull&id=1257167513&archive=&start_from=&ucat=23 15 According to Art 50 EC Reg 1083/2006. 16 Source: http://www.dps.tesoro.it/obiettivi_servizio/servizio_idrico.asp 17 ANCI (Associazione Nazionale Comuni Italiani), 2009, Oltre le ordinanze i sindaci e la sicurezza urbana, March 2009 18 The study identifies three indicators: the presence of mafia clans, the number of confiscated estates and disintegration of administration in the territory. 19 Censis, 2009, Il Condizionamento delle Mafie sull’economia, sulla società e sulle istituzioni del Mezzogiorno, Rome.

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treatment, and it must be provided in accordance with principles of efficiency, effectiveness and economy complying with national and community laws21.

The IWS is organized on the basis of the Optimal Territorial Ambits (OTAs)22, which includes the municipalities that cooperate for the purposes of the IWS. The OTAs are associations of municipalities which in Italy are institutionally responsible for ensuring local public services to citizens23. The rationale for the OTAs comes from the principle that the use of water for any purpose is permitted by law only in accordance with criteria of solidarity, with the aim of safeguarding the rights and the expectations of future generations to enjoy a healthy environmental heritage24. The extent of their territories is defined by the Regions, by taking into consideration the main hydrographical boundaries and the boundaries of municipalities, in order to achieve adequate scale in terms of population served and water volume delivered.

The OTAs are managed by territorial authorities (Authority of the OTA25 or AOTA), constituted by the assembly of the mayors of the relevant municipalities, with the presidents of the provinces concerned (or their representatives), and they are equipped with technical and administrative bodies to manage the service contract26. The Ambit Authority is responsible for the planning of the service, including the definition of the investment programme, through the drafting of the so-called Ambit Plan27, with a time horizon appropriate to the duration of the service concession (20 to 30 years). Following the principle of operational and investment cost recovery and the polluter pays principle, the (mean real) tariff of the integrated water service28, which is billed29 and collected30 by the service providers, is also determined by the AOTA in the Ambit Plan.

Aqueducts, sewers, sewage treatment plants and all other infrastructure of the IWS are publicly owned and are State property31. Service provision in the whole OTA territory is entrusted to a service company, by means of the form chosen by the Ambit Authority among the following three options32: i) a company exclusively and directly owned by the

20 Galli Law has been replaced, with minor changes, by the Title II of the Section III of the Part III of the Legislative Decree 3 April 2006 No. 152 "Regulations on the environment". 21 Art. 141, par. 2 of the Legislative Decree no 152/2006. 22 As originally established by art. 8 par. 1 of the Law no 36/1994 (the so-called Galli Law) and reaffirmed by art. 147 par. 1 of the Legislative Decree no 152/2006. 23 Based on a recent decision by the Constitutional Court, the State is in any case ultimately responsible for public services and therefore it must replace the OTAs in the event that municipalities, for whatever reason, fail in their duty. 24 This, together with the principle that water is publicly owned, was established, reaffirming principles already contained in previous legislation on water, by Art. 1 of Galli Law, redrawn with some changes in Art. 144 of the Legislative Decree no 152/2006, which states: "1. All surface water and groundwater, although not extracted from the subsoil, belongs to the State. 2. Water is a resource that must be protected and used in accordance with criteria of solidarity, safeguarding the expectations and the rights of future generations to enjoy an unimpaired environmental wealth.” 25 Art. 148 of the Legislative Decree no 152/2006. Recently, Law no 42, 26th March 2010, repealed the Ambit Authorities, subsequently extended until the end of this year (2011), returning the decision-making power to the Regions. Regions are currently developing legislative proposals in this regard. 26 The relationship and the reciprocal obligations between the Ambit Authorities and the service suppliers are set out in Art. 151 of Legislative Decree no. 152/2006 and are ruled by means of a contract drawn up by the Ambit Authority. 27 Art. 149 of the Legislative Decree no 152/2006. 28 Art. 154 of the Legislative Decree no 152/2006. 29 See footnote above. 30 Art. 156 of the Legislative Decree no 152/2006. 31 Art. 143, par. 1, of the Legislative Decree no 152/2006. 32 Art. 150 of the Legislative Decree no 152/2006.

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municipalities or other local bodies of the OTA (the so-called in-house company), ii) a company partially owned (majority or minority) by the above mentioned local bodies (a form of PPP), where the private partner must be chosen through public tender, iii) a fully private company, to be chosen by public tender.

Among the 92 Italians OTAs, only 69 have entrusted the IWS. There are 114 service companies33, distributed as follows: companies owned by the municipalities (in house): 57; partially publicly owned companies (PPP): 32; fully private owned companies: 7; and companies of non-specified kind: 1834.

The Italian regions implemented the national legislation between the 1995 and 2000 and the constitution of the OTAs is realized in different ways. In some regions there is just one OTA which covers the whole region35; in other regions the OTAs are mixed: they cover only parts of provinces36 or in some cases they cover interprovincial territories37. Finally, in some other regions the OTAs cover provinces38, and the region of Sicily is one of them.

After the implementation of the “Galli Law”, the integrated water system in Sicily is structured as follows:

• Nine OTAs are in place: they coincide with the boundaries of Sicilian provinces and are respectively controlled by the Province and the municipalities39.

• A so called over-ambit service sector has been established: a new company40 that, under a long-term concession contract, is entrusted by the Region with operating, maintaining and implementing investment in large aqueducts, supplying bulk water to more than one OTA.

• A Regional Agency - “Regional Agency for Waste and Water services41”- entrusted with controlling and coordinating the entire water service in the region, later abolished from January 1st 2010 and replaced (with the same responsibilities) by the Regional Department of water and of wastes (Dipartimento regionale dell’acqua e dei rifiuti)42, one of the branches of the Regional Department of Energy and of Public Utilities (Assessorato regionale dell’energia e dei servizi di pubblica utilità)43.

33 As also stated by regional laws, the opportunity to entrust with more than one service concession was allowed in some OTAs. 34 Co.N.Vi.R.I., 2010, Relazione annuale al Parlamento sullo stato dei servizi idrici Anno 2009 , Rome. 35 This is the case in small regions like Val D’Aosta, Molise and Basilicata, but also in larger regions like Puglia and Sardegna. 36 This is the case in Piemonte, Friuli Venezia Giulia, Veneto, Umbria, Marche and Abruzzo. 37 This is the case in Toscana, Lazio and Campania. 38 This is the case in Lombardy (with the exception of the metropolitan area of Milan), Liguria, Emilia Romagna, Calabria and Sicily. 39 Source: Sogesid S.p.a. 40 The Sicilian company is called “Siciliacque S.p.A.”, was constituted in 2004 and took over EAS (Ente Acquedotti Siciliani), the previous Regional public body entrusted with managing the large aqueducts in the whole region. It is controlled by private companies, selected by tender, which hold 75% of the shares, and by the Region of Sicily which holds 25% of the shares. 41 The Agency is called “Agenzia Regionale Rifiuti e Acque”, it is constituted and regulated by article 7 of the regional law of 22nd December 2005. The Agency has taken over from the previous structure of the Commissioner for the water emergency in Sicily. 42 Site : http://pti.regione.sicilia.it/portal/page/portal/PIR_PORTALE/PIR_LaStrutturaRegionale/PIR_AssEnergia/PIR_Dipartimentodellacqu aedeirifiuti. 43 Site: http://pti.regione.sicilia.it/portal/page/portal/PIR_PORTALE/PIR_LaStrutturaRegionale/PIR_AssEnergia.

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Box 1.1 ITALIAN LEGAL FRAMEWORK FOR WATER SECTOR With a body of legislation developed since 1994 there has been an attempt to overcome the previous fragmentation and to rationalise the regulation of the water sector. In what follows, the main cornerstones of the legislative framework are briefly presented. - Directive 2000/60/EC of the European Parliament and of the Council establishing a framework for the Community action in the field of water policy. - Council Directive 98/83/EC of 3 November 1998 on the quality of water intended for human consumption. - Council Directive 91/271/EEC of 21 May 1991 concerning urban wastewater treatment. - Royal Decree of December 11, 1933, No 1775, Approval of the consolidated laws on water and on electrical systems44, which still regulates the use of surface and groundwater (all publicly owned) through the so-called concessions of public water. - Legislative Decree 3 April 2006, No 152, regulates the environmental sector45. The law transposes Directive 2000/60/EC into Italian legislation, but also reformulates provisions already contained in previous laws such as, among others, the “Merli” law46 on the governance and the protection of water bodies, law 183/8947 on soil defence and the "Galli" law48 on water services. The third section of Part III deals with the management of water resources and of the so-called integrated water service. Regional laws, subsequently enacted to implement the provisions of the above-mentioned law in the regional areas, have established the rules regarding key points of the institutional framework of the integrated water services, such as the delimitation of the optimal territorial ambits, the forms and the rules of cooperation between local authorities, the guidance and coordination of the institutional actors in the field of water resources, etc. - Decree of the Minister of Public Works 01.08.1996, Normalised Method to define the cost components and to determine the reference tariff49. This decree sets the criteria and the conditions which the ambit Authority must follow in calculating the reference average real tariff of the integrated water service in each optimal territorial ambit. The outcome of a recent referendum in Italy has actually abolished the tariff component linked to the return on capital invested by the water services firms. - Legislative Decree 2 February 2001, No 31, Implementation of Directive 98/83/EC on the quality of water intended for human consumption50. Source: Authors

1.3 STRUCTURAL FEATURES AND SERVICE DELIVERED At present, drinking water in Palermo and the surrounding municipalities is supplied both from surface and groundwater sources. These include51 four weirs52, four reservoirs53, four spring groups54 and twenty-nine wells, the last of these sited in the foothills of the mountains that surround the Conca d'Oro and in the hills of Bagheria, a town East of Palermo.

44 Regio Decreto 11 December 1933 n. 1775, Approvazione del Testo Unico delle disposizioni di legge sulle acque e impianti elettrici. 45 Decreto legislativo 3 aprile 2006, n. 152. Norme in materia ambientale 46 Legge 10 maggio 1976, n. 319, Norme per la tutela delle acque dall'inquinamento. 47 Legge 18 maggio 1989, n. 183, Norme per il riassetto organizzativo e funzionale della difesa del suolo. 48 Legge 5 gennaio 1994, n. 36. Disposizioni in materia di risorse idriche. 49 Decreto del Ministro dei Lavori Pubblici 01.08.1996 Metodo Normalizzato per definire le componenti di costo e determinare la tariffa di riferimento. 50Decreto Legislativo 2 febbraio 2001, n. 31, Attuazione della direttiva 98/83/CE relativa alla qualità delle acque destinate al consumo umano. 51 Source: AMAP web site (http://www.amap.it/distribuzione.asp). 52 They are: Imera river, Eleuterio river, Santa Caterina on the Oreto river and Madonna del Ponte on the Jato river. 53 They are: Scanzano, Piana degli Albanesi, Poma and Rosamarina. 54 They are: Scillato, Presidiana, Risalaimi and Gabriele.

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Figure 1.3 CHOROGRAPHY OF PALERMO WATER SUPPLY SYSTEM

Source: Project Designer

The water sources are distributed along a wide strip of territory stretching from Partinico in the West, to Cefalù in the East, over 90 km in length; the aforementioned water sources are mainly located in the East and south-east of the city: only one reservoir and one weir is located on the West side. The water supply system is connected upstream with three municipal and one industrial networks providing water to towns and industrial sites in the surrounding Palermo territory. Before being available to users, surface water is treated in four purifying plants55 and then, together with the rest of the water, it is collected in storage tanks (nine tanks with a total storage capacity of 247,000 m3) and fed into the distribution network. Water from the sources to the storage tanks is carried by four main water pipes56 and two recently built systems57, amounting to an overall length of about 400 km of pipes.

55 With an overall treatment capacity of about 4,700 l/s. 56 Scillato-Presidiana, Scanzano-Risalaimi, Jato and Agro-Palermitano system. 57 Rosamarina-Imera and Rosamarina-Risalaimi.

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Figure 1.4 A SCHEMATIC REPRESENTATION OF PALERMO WATER SUPPLY SYSTEM

Withdrawal of the Withdrawal of the natural resource natural resource

Raw water taken from surface Water taken from groundwater sources sources Losses of raw water in the mains Raw water from other water supply systems Losses of water in the mains Raw water to other water supply systems

Water entering the treatment Losses and water consumption in the treatment of Purifying plants Drinking water from other drinking water water supply systems Output water from the treatment Drinking water to other Losses of drinking water supply water systems in the mains

Water entering the storage tanks

Overflows from the tanks Storage tanks

Water supplied from Losses of drinking the storage tanks water in the internal mains Water fed into the distribution networks Losses in the distribution network Distribution network

Unauthorised Apparent losses due to consumption measurement errors Authorised consumption

Metered Unmetered consumption consumption Apparent losses due to billing errors (unbilled metered Billed consumption Unbilled consumption consumption)

Users

Spring Well or well field Weir Reservoir Source: Authors

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In the downstream system, once collected in the tanks, water is delivered to residential and industrial users. The municipal distribution network (about 900 km in length), branches out from the south-east to the north-west part of the city. About 50% is distributed through welded joint pipes in High Density Polyethylene and it corresponds to the sections restructured during the 1997-2003 interventions. The remaining is distributed through the old system consisting of cast iron pipes. In the new sections of the distribution network water is supplied according to the concept of “water districts”, meaning that the network is divided into functionally independent sub-networks.

The system ensures the provision of drinking water in the whole territory of Palermo municipality, covering a total area of 158.9 km2. Water is collected in the south-eastern part and then delivered through the city by the distribution network. In order to ensure a more balanced distribution of water between the Eastern and Western part of the city, an external bypass, known as “Pedemontana pipe”, is used, built with the interventions under assessment, which does not interfere with the internal distribution network (crossing the city) and is located in the highest part of Palermo (over 70 metres above sea level). It consists of a main pipe which connects a chain of storage tanks where water is collected in order to be fed into the sub-networks supplying water to inhabitants living in the city.

Box 1.2 AMAP MANAGEMENT IN THE OTA OF PALERMO The service provided by AMAP S.p.A. is part of the IWS organization of the OTA 1 of Palermo. According to the service agreement stipulated by AMAP with OTA and Acque Potabili Siciliane S.p.A.58 (APS, supplier of IWS in the remaining municipalities of the OTA 1 of Palermo), AMAP is actually responsible for the operations and the ordinary and extraordinary maintenance of the IWS infrastructures in Palermo area. It is also in charge of the supply, adduction and potabilization infrastructures which supply mostly Palermo59 but also some other towns along the East and West coast of Palermo60. The services fees are set by OTA but collected by AMAP, which issues bills to consumers. AMAP annually transfers a share of the proceeds to APS (slightly more than 5 MEuro61), both for private co-financing of planned investments in Palermo and the financial balance between the operating costs of AMAP and the ones covered by APS in order to provide the IWS in the remaining part of the ambit. Through the aforementioned agreement, AMAP and APS are committed to finding ways of organizational implementation of their services with the aim of using in a synergistic way the opportunities offered by their respective skills and expertise, with the goal of reducing total costs of the service. In fact, investments in the infrastructure of the Palermo net, together all the other investment in the OTA, are established in the three-year operational plan (TOP) approved by the AOTA and they are carried out by APS, which also provides the co-financing. In this framework, in the first TOP, investments in the infrastructures managed by AMAP are planned for about 55.3 MEuro, about 13 MEuro of which concerns investments related to the water supply network62, aiming at further improving the service. These investments have not been carried out yet (see Section 2.2). Source: Authors

58 Approved by the Authority of OTA with the decision C.S. n.1 of 09.07.2009: Approval of the service agreement between AOTA 1 Palermo, AMAP. S.p.A. and Acque Potabili Siciliane with attached transitive act. 59 They are external waterworks (or water schemes): Scillato –Imera –Presidiana; Jato; Scanzano – Risalaimi; Piana degli Albanesi – Gabriele – Oreto; Rosamarina. 60 AMAP also provides a purification service for the effluents from the municipalities of Villabate, Ficarazzi, Misilmeri (Frazione Portella di Mare), Monreale, Altofonte by the sewage treatment plant of Acqua dei Corsari. 61 net of payment of instalments of the previous loans 62 They are the following interventions: Sub-network Sferracavallo (~3.4 M€); Part of the completion of the sub-network Villagrazia Alta e Bassa (~4.0 M€); Rationalization of the connections of the new tanks to the concerned sub-networks (~2.7 M€); Development of the supplying to the new sub-networks (~2.9 M€); Maintenance n 13 tanks (~0.2 M€).

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Water collection and distribution in Palermo is responsibility of AMAP S.p.A. (Azienda Municipalizzata Acquedotto di Palermo, Municipal Company Aqueduct of Palermo)63. Originally, it was entrusted only with the provision of drinking water service but in 1994, it became responsible for the management of the entire water cycle (the so-called Integrated Water Service-IWS) partly as a result of the reforms introduced by the National Law n.36/199464.

The interventions occurred in the period 1997-2003 were promoted by AMAP as part of a wider programme of modernisation and improvement of the water supply system in Palermo, which long suffered from water loss problems. However, although part of a larger strategy of interventions, the project assessed can be considered as a stand-alone unit of analysis since the remaining components were either not realised (in particular those related to the distribution network) or were not functionally related to it (for example some components related to the adduction and external network).

1.4 CURRENT PERFORMANCE In 2010, water abstraction from surface and groundwater sources amounts to a total volume of 125,829,126 m3, of which 68.7% is to supply drinking water to Palermo Municipality. In the same year, 120,000 users65 received water from the system. Among those users more than 60% were supplied by the part of network (six sub-networks) rebuilt as part of the project under analysis.

At present, a continuous service provision is ensured to 75% of users, while the remainder – particularly those living in the Southern part of the city and in the Northern suburb of Sferracavallo – are still subject to supply disruptions. As it will be further discussed below, the state of decay of some sub-networks is so great that maintaining them in operation for 24 hours would lead to a further worsening of the service delivered, with the percentage of water losses and breakages in the pipelines increasing. The current situation in terms of water availability is however quite good compared to the situation in 1997, where continuity of service was guaranteed only in two areas of the city (see Figure below).

However, even in the areas where water is regularly supplied, water pressure is not always adequate. This is why some of the users still use their storage tanks and electric pumps to raise water pressure. Moreover, even in one of the new sub-networks, water pressure is still sometimes not optimal, due to the inadequacy of the feeding system.

63 AMAP was set up by Palermo Municipality in 1947 (Municipal decision dated on 15 March 1947). Later, in 1999, AMAP changed its legal structure (Municipal decision n°131, dated on 13 May 1999) and became a “special agency”. Two years later (in 2001), the company became a limited company, fully owned by the Municipality of Palermo. 64 See the previous paragraph 65 1 user corresponds to about 6 inhabitants

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Figure 1.5 THE WATER SERVICE PROVISION IN 1997 AND 2011

Areas with a continuous service provision Source: AMAP

From the users’ point of view, water service provision in Palermo is good. Results from the survey of customer satisfaction, carried out by AMAP in 2010, confirm that users are satisfied with the continuity of the service provision and the quality of water delivered66.

The system is currently suffering from a severe problem of water losses. About 47.8% of the water fed into the distribution network in 2010 (86,406,847 m3) was lost67. This is not surprising considering that over the last thirteen years (from 1997 to 2010), the gap between the volume of water fed into distribution network and that billed by AMAP has been on average about 46.22%. The water losses ranged from a maximum of 48.7% in 2006 to a minimum of 39.3% in 2002 respectively, corresponding to the highest and lowest volume of water fed into the distribution network.

The issue of water losses in Palermo is not straightforward. Both “real” and “apparent” water losses68 are recorded and they can be explained by referring to four kinds of problems currently affecting the water service provision in Palermo.

The first problem concerns the distribution network. Some sub-networks, specifically those supplying water to the Southern part of the city, are deteriorated by time and corrosion and are thus subject to continuous breaks. They are made up of cast iron pipes, dating back to the end of the Second World War. The user connections to these sub-networks are obsolete and experience breakages as well. As a consequence, a share of water pumped into the pipes gets

66 On a scale from 1 (not satisfied) to 4 (very satisfied), users declared themselves to be fairly satisfied with the continuity of service provision (3.1) and with the quality of water (3.7). Source: AMAP (2010), Survey of Customer Satisfaction on the services delivered by AMAP, carried out by STAT consulting s.r.l. 67 This is the difference between the water fed into the system and the water sold by AMAP (in 2010 amounting to 45,113,511 m3). 68 Real losses are the physical losses (or leakage) due to pipe breakages. Apparent losses are caused by revenue meter under- registration, water theft and billing errors.

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lost along its journey to the users. To deal with this issue, some repair interventions have been planned by AMAP for the worst sub-networks69 and investments were undertaken to replace older user connections with new ones.

Figure 1.6 WATER BALANCE IN PALERMO OVER THE YEARS

100,000,000

90,000,000

80,000,000

70,000,000

60,000,000

50,000,000

40,000,000 1997 1999 2001 2003 2005 2007 2009 2011

volume of water fed into the system volume of water billed

Source: Authors

The second problem is related to the water meters currently used in Palermo, which in some cases are not able to register the exact amount of water consumed by users, through being too old and characterised by a low degree of sensitivity70. The main consequence is that users do not pay for the exact amount of water they consume, causing a loss of revenue for AMAP. In collaboration with the University of Palermo, AMAP has recently started to study the measuring systems with the aim of reducing the economic effects of their inaccuracies (see Section 4 for further details). Results of this study show that water meter accuracy is influenced by the age and extent of wear of the meter, and by the presence of storage tanks (see Box 6 for details). As a consequence of these findings, water meters older than ten years are being replaced. During the last five years, more than 58,000 water meters have been replaced by AMAP.

69 Two projects have been drafted for rebuilding two sub-networks (Boccadifalco and Villagrazia) which are located in the higher part of the city (over 70 meter above the sea level), see Section 2.2. 70 Water meters in Palermo are mainly of a multi-jet type with a measuring capacity of 15 l/h, meaning that if the volume of water flows at a lower quantity than 15 l/h it is not registered and not charged to users.

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Box 1.3 HOW DOES THE WATER METER WORK? Meters are instruments for charging customers for the water they use. There are several ways water meters can be classified but meters encountered in water distribution systems either operate based on principles of positive displacement or the velocity of flowing water. Positive Displacement Meters (PD meter) rely on all water flowing through the meter to "push" the measuring element (generally there is a piston or disk moving a magnet that drives the register). PD meters are sensitive to low flow rates and accurate over a fairly wide range of flows. There are typically two types of positive displacement meters used in the drinking water industry, nutating disk and piston meters. These types of meters are used in homes, small businesses, hotels and apartment complexes. They are available for pipe sizes from 5/8 inch to 2 inches. Velocity-based designs include single- and multi-jet meters and turbine meters. They operate based on measuring the velocity of flowing water through a known cross-sectional area to obtain a flow rate. The volume of water passing through the meter can then be calculated by multiplying the flow rate by the period of time being considered. While, multi-jet meters are very accurate in small sizes and are commonly used in 5/8 inch to 2 inches sizes for residential and smaller commercial uses, turbine meters are generally available for 1.5 inch to 12 inch or higher pipe sizes and for large commercial users, fire protection, and as master meters for the water distribution system. Source: Authors

Although water meter accuracy error is a significant component of the apparent losses of the water supply system in Palermo, a share of these is also due to water theft, i.e. unauthorised user connections. This phenomenon is more widespread in – but not confined to - the areas of the city characterised by security problems. In some extreme cases it was reported that the water service is directly provided by organised crime, which also collects water tariffs for it (see Box below).

Drinking water is regularly supplied in the area of ZEN 2 and the inhabitants pay a monthly amount for the water consumed (ranging from 10 to 30 Euro), depending on family size, and receive a receipt in return. The responsibility for the collection of the tariff is not with AMAP but with an unknown person who has the key of the tank where the water is collected before being delivered to the families. About one year ago, the Independent Institute of Council Houses in Palermo invited 180 families to legalize their water consumption. Today, only 11 families have replied. A further plea has been made on September. If the families do not reply in time, they will be forced to move out of their houses. Source: La Repubblica, September 23, 2011

Finally, water service provision in Palermo is affected by the problem of users in arrears with the bill payments. In order to force these users to pay for the water they have consumed, a taskforce was set up by AMAP about one year ago. The users in arrears have 40 days from the receipt of the communication to fulfil it, otherwise the water delivery will be discontinued. At the beginning of 2011, only 65% of users in arrears cleared these arrears, while about 2,000 users are still in debt. Although deprived of the use of water by AMAP, these latter customers have availed of unauthorised connections to the distribution network71.

The issue of unpaid bills is not related to an affordability problem, as highlighted in a Court of Auditor report72. Currently, the water tariff in Palermo73 amounts to 0.77€/m3 for an average

71 Source: La Repubblica, March 31, 2011. 72 Court of Auditors, 2009, Statement of preliminary findings, performance audit of ERDF co-financed investment in Sicilia’s public water supply (Italy), Audit visit of 29 June 2009, 9 July 2009. 73 As far as the only water distribution service is concerned.

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consumption of 120 m3 per year, which represents an annual expenditure of 92.96 Euro per year per household, corresponding to 0.26% of the yearly household income74.

74 International literature indicates thresholds for public utilities affordability (as a percentage of total income or expenditure) ranging from 2.5 to 5%. See: OECD (2003) Social Issues in the Provision and Pricing of Water Services, OECD, Paris.

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2 ORIGIN AND HISTORY

2.1 BACKGROUND The water distribution system in Palermo dates back to the second half of the Nineteenth Century, when the troops coming back from the Crimean War brought with them a very dangerous strain of cholera, which fatally affected a high percentage of the population. The need to guarantee a safe water provision system made it clear that the existing system did not ensure the necessary conditions for healthy water provision75. Spurred by the urgency of the situation, the Municipality of Palermo had to build a modern and efficient system able to provide the inhabitants with water of a higher quality.

Box 2.1 FROM THE WATER TOWERS TO SCILLATO WATERWORKS Until 1885 the water service in Palermo was provided via water towers, an old system dating back to the period of Arab rule in Sicily. Water towers were high permanent squared structures, which were originally placed on the city walls. Later, following the expansion of the city, they were also built in the city squares. Under this system the water taken from different sources was piped by means of clay pipes (called “incatusati”) in large tanks (called “Ricettacolo Magistrale”). Through cone- shaped pipes (called “catusi”), water was carried up to the top of the water towers and then collected in vessels (known as “urne”). From there, it was piped to secondary towers built on the walls of houses and finally delivered to the users by means of cone-shaped pipes. Users usually collected water in bowls, called “Giarre”, which were built of clay or zinc. About thirty water towers, and ascending and descending pipes on the outer walls of buildings, are still visible today in Palermo. This system did not ensure high quality water supply. Given the joints and the material they were composed of, the clay pipes easily allowed plant roots to penetrate inside and contaminate the water. In addition, water could be contaminated by cesspits (collecting wastewater), which were located close to the pipes. These problems were taken into account during the construction of Scillato waterworks. The wastewater flow was moved away from the water supply system and the pipes were built of cast iron and no larger than 300 mm in diameter. Source: Authors

It was therefore decided to build waterworks to bring water from the Scillato spring (located in the Southern part of Palermo and originating in Madonie, a major mountain group in Sicily) to the city. The construction company was identified through a public call for tenders procedure including a scheme of project financing. The winning company won the concession of water service delivery for thirty years. This company was the Società Acqua di Scillato (Scillato Water

75 “The issue of supplying abundant and healthy water was long worrying Palermo Municipality, but a solution was demanded following the cholera episode (1884 – 1885) and scientific findings which declared bad water as the vehicle for contagious diseases” Di Piazza, M. (2008), Palermo, città d’acqua. Aspetti storici e naturalistici dell’acquedotto, AMAP s.p.a.

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Company) owned by the Brothers Biglia and Vanni76. The works included waterworks (about 70 km in length), two reservoirs (located in the south-eastern part of the city and with an overall capacity of 36,500 m3) and a piped network in cast-iron, 80km long (see Figure 2.1 a). Some difficulties were faced during the realisation phase, especially due to the lack of adequate means of transport and excavation (material was carried to the mountains by donkeys and excavations were made by hand). However all the obstacles were overcome and in three years the waterworks were completed: in August 1896, Scillato waterworks were completed and water provided to houses. It was welcomed as a work of great value.

“Scillato waterworks are a work of art, which is a credit to Italy and the envy of other countries. The description presented in this document, although detailed and aimed at emphasising it and describing the difficulties encountered, should admit that those responsible for its construction became aware of these difficulties and were able to overcome them”. Source: Relation on the testing of Scillato waterworks, quoted during an interview

In the following years, the development of the water supply network followed the expansion of the city north-westwards. The system worked well until the end of World War II, when a series of events led to critical conditions in the provision of the service. First, the city of Palermo was bombed and the entire infrastructural system was damaged. Then, when Sicily became an autonomous Region with a special statute and Palermo its capital, the population in Palermo started to rapidly increase (thanks to a high rate of immigration), and the expansion of the city followed. The water distribution system, although repaired after the damage caused by the war, was not able to meet the increasing water demand. The operating company went bankrupt and the Palermo Municipality set up a municipal company to operate the service.

In 1952, an ad-hoc Commission identified a number of urgently needed interventions to provide additional water resources and huge investments were undertaken by the Cassa del Mezzogiorno77 to exploit new water sources78. In order to address the systematic water shortages, an increasing quantity of water was provided to the system79 but this did not solve the problem. Another option was to influence the level of water consumption; therefore it was also decided to revise and increase the tariff, keeping a low tariff for low water consumption and making additional consumption more expensive80. However, the expected results were still not achieved.

76 In 1886 a British company was awarded the competition launched by Palermo municipality but, for reasons still unknown, they did not start the works. Seven years later (12th February 1893), the Municipality entrusted the Biglia Brothers and Alessandro Vanni with the construction of the Scillato waterworks. 77 A public development agency founded in 1950 to promote industrial development in Southern Italy, with the aim of bridging the gap with the Northern Regions. It ceased operations in 1992. 78 In the period between the end of the 1960s and the beginning of the 1980s the following interventions occurred: the building of Scanzano-Risalaimi waterworks (completed in 1968), Jato waterworks (1975-1978), and the new Scillato waterworks (beginning of 1980s). 79 The Scanzano dam and a purifying system were built at the end of the 1960s providing 1,000 l/s to the city. After ten years another dam and a purifying system were added in Parsimico. Additionally, wells were sunk to provide further water to the system. 80 The highest rate was 2000 Lire/m3, slightly more than 1 Euro/ m3.

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Figure 2.1 PALERMO WATER SUPPLY’S HISTORICAL DEVELOPMENT a) endEnd of 1919thth century century b) ‘30 years ‘30 years

Altarello Tank

S. Ciro Tanks Gabriele Springs S. Ciro Springs

Scillato Acqueduct

c) d) 50’‘50 – ‘60 60’ years years ‘70‘70 –– ’80‘80 yearsyears

Jato Acqueduct

Petrazzi Tank

Gabriele Purifying plant

Scanzano Acqueduct

Source: Authors’ elaboration of AMAP maps

2.2 FINANCING DECISION The approach to water management started to change when at the end of 1970s AMAP commissioned an expert study81 to understand how the problem of water resources scarcity could be overcome. By analysing the historic data of water provided to the system and the water invoiced, the experts realised that the additional water provided over the years did not

81 AMAP, (1978) Progetto di dimensionamento e verifica idraulica della rete di distribuzione della città di Palermo.

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actually translate into higher water consumption. In contrast to common perception, the study results pointed to the existence of a high incidence of leakages as the main source of scarcity, and recommended the repair of the distribution network as the only viable solution. Providing more water to the system was ineffective given the poor state of the distribution network.

Another phenomenon occurred in the late Eighties: the ‘water searchers’. And this is not meant in a metaphorical way. The citizens of Palermo, exhausted by the dry spell, really used to look for water. How? By digging wells everywhere. Sometimes with the help of water diviners. That was a widespread phenomenon, people digging wells everywhere, even within apartment buildings or basements. Source: Giuliana Saladino, quoted by Gabriello Montemagno in Repubblica.it, 23 July 2008.

Together with the state of the infrastructural asset, however, poor managerial capacity in AMAP as well as weak political commitment to solve deeply rooted problems in the water supply system were the main cause of water shortages. Historically, water provision and distribution in Palermo was affected by serious problems of mismanagement and was exposed to the influence of organised crime.

During 1989 and 1991 in Sicily there were very little rain and severe droughts affected the Region. The agriculture sector was seriously affected and water was supplied to the population with disruptions of three days or more. Inhabitants were forced to take water from tanks located in the main squares of the city and the scarcity of water and uneasiness created among the inhabitants was high.

In a break with the past, at the beginning of the 1990s Palermo experienced a period of in- depth political and cultural renovation. At that time the municipal authority committed strongly to fighting organised crime and corruption and promoted transparency and accountability in public management and tendering of public works. In this new political and institutional context a newly appointed board at AMAP promoted a completely different approach to the problem of water shortages. A staff of engineers was charged with drafting a “Master Plan for the new water distribution network in Palermo” (hereafter the Master Plan), which was developed taking the design concept of the study carried out by AMAP years previously, identifying water losses as the key problem of the water supply system.

Box 2.2 WATER SUPPLY AND ORGANISED CRIME The involvement of organised crime in the water sector in Sicily dates back a couple of centuries. Before water regulation was in place, water distribution in the countryside of Palermo was under private control. Land tenants sold water to fountain-keepers (the so-called ‘fontaniere’) who provided the water to users. The fountain-keepers and the tenants were often strictly linked to the mafia organization, and the control of the water sector caused conflicts that were at the origin of the first “mafia wars”82. Water was an essential resource for the cultivation of citrus fruits which were exported to the national and international markets, especially to the United States. In this way, control of the water sector and of the

82 In this regard the article wrote by Umberto Santino, L’acqua rubata (The water that has been stolen), and published by the Sicilian Center of Documentation: “Giuseppe Impastato”, in 2006, reports a series of murders by the mafia-related to the control of water distribution: in 1874, the plumber Felice Marchese was killed in Monreale, a towns very close to Palermo. The murder was the consequence of a conflict between two different mafia organizations: the Giardinieri and the Stoppaglieri. This was the first documented mafia war. In 1890, Baldassarre La Mantia, the guardian of the water of the psychiatric Institution of Palermo, was also killed. He refused to favor the tenants Vitale, who were the bosses of the Alterello di Baida section of Palermo, Also in 1945, the secretary of the trade union offices, Agostino D’Alessandro was killed because he fought against the power of the mafia in the water service.

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citrus sector was in the hand of organized crime83. In more recent times, the mafia has also maintained control within the newly established irrigation consortiums. The most important case is the one regarding the consortium of the High and Medium Belice. It was instituted in 1933, during the fascist era, and occupied a district of 106,000 hectares for the realization of a dam on the river Belice, in the south-west of Sicily. The consortium remained non- operational until 1944 because of the opposition of the mafia which was afraid of losing its monopolistic power over the water sector.84 In the 1960’s Palermo started suffering serious water supply problems. According to the urban planning regulations, produced by the Ministry of Public Works in 1968, only 13 wells were being used as public water sources. Two of them were salty and the others were very poor in quality. However, since the beginning of the 1990s an additional 114 springs and 600 wells were being used by private companies (many of them under mafia control) to abstract water directly from the water table, which was becoming more and more depleted. All the wells in the territory should have been publicly owned but, they were in fact, controlled privately, so that even the municipal company, AMAP, used to buy water from private wells, at a cost of approximately 800 million Lire per year. In 1956 management of the water service delivery of Palermo changed from the private to the public sector. New managers of AMAP were nominated, reflecting political interests. The person in charge of managing the changeover on behalf of the public authority was Vito Ciancimino85. He decided the recruitment strategy and control systems, and maintained strict control within the AMAP company. In 1977 his cousin became the president of the company. This was the beginning of a series of public contracts awarded by AMAP and the Municipality of Palermo to companies under the influence of organized crime86. In particular, AMAP granted some tenders to a company linked to Ciancimino87. The company was in charge of maintaining and restructuring the water network of some Palermo districts. In 1990, Vito Ciancimino was definitively indicted and arrested together with his business partner, the manager of AMAP in the period 1979-1987 and the manager of the aqueduct88. Source: Authors

The original design was an ambitious and innovative plan to completely restructure the water supply system and replace the distribution network. As far as water resources were concerned, the Plan included interventions to acquire new water resources (such as private wells) and ensure the full exploitation of existing ones; interventions of extraordinary maintenance and improvement of the oldest purifying plants and pumping systems. With regard to the distribution network, the Plan included interventions for replacing the oldest part of the network, ensuring a balanced distribution between the Eastern and western areas of the city and measuring the key parameters of water distribution (such as pressure, rate of flow and quality). The building blocks of the project design were the following:

• In order to rationalise the distribution system, the Palermo territory was divided into three altimetrical layers89 above sea level. In order to have more flexibility in water

83 It seems that this is the way in which they started to come in contact with emigrants in United States and some of them became the founders of the mafia organization in the US. 84 Umberto Santino, L’acqua rubata (The water that has been stolen), the Sicilian Center of Documentation: “Giuseppe Impastato”, 2006. 85 Vito Alfio Ciancimino (1924-2002) was a politician belonging to the Christian Democrat party. He was in charge of managing public works in the municipality of Palermo from 1959 to 1964. In 1970 he became the mayor of the city. In 1993 he was convicted of mafia association and corruption. 86 Gabriello Montemagno, Spreco e mafia, l’affare acqua, Repubblica.it, 23 July 2008. 87 He was the second ‘sleeping’ partner of the company, with Romolo Vaselli being the single official owner. The same company was awarded several times the tenders for the provision of waste collection and street cleaning. 88 Saverio Lodato, Manette per Vito Ciancimino (Ciancimino in handcuffs), L’Unità, 6 June 1990. 89 From 0 to 35 metres above sea level (the most populated area), from 35 to 70 metres above sea level and more than 70 metres, corresponding to the mountainous, less populated area of the city.

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distribution, each layer was subdivided into “water districts” or “sub-networks” (ranging from a minimum of 4,000 to a maximum of 165,100 habitants). A total of 17 sub-networks are currently in operation. The main result of this zoning process is that each sub-network operates as a stand-alone unit by supplying water to users independently of the others, in contrast to the past when the entire city was served by a unique undivided system.

• In order to facilitate water distribution from the south-eastern part of the city where it originated to the western part where the city mainly developed, a pipe bypassing the city (the “Pedemontana”) and provided with large tanks90 to supply water was designed.

• Lastly, in order to better supply the entire system, the experts designed the construction of an underground gallery (similar to the ‘London ring’) to be built under the identified sub-networks and aimed at providing them with water through a system of wells. This was the most expensive and controversial component of the entire design.

This plan cost about 800 billion Lire91, the most expensive component being the underground gallery for water supply (about 600 billion Lire). The plan was approved by the R.A.T.C (Regional Administrative Technical Committee)92 on 29 September 1990 (Resolution n.17982) but it was not immediately implemented.

A new management board of AMAP was appointed in 1994. The selection criteria of its members were strictly related to merit and professional capacity. At the beginning of its activity the new AMAP board prepared a long-term development plan aimed at supporting company development in the following years. The plan identified the level of service provision to be achieved and the necessary organisational and managerial strategies AMAP should implement, stemming from the requirements of the new legislative framework embedded in the national water reform. This development plan, drawing from the need to enhance service quality, was design to transform the company into a modern utility company.

The most important event for the company, which should materialise in the first months of 1999, is the transformation of the Municipal Company into a Special Company with a subsequent reorganisation of the entire structure, with the objective of achieving more efficiency and effectiveness as well as an improvement in the quality level of the service provided to citizens. Source: Piano Programma, AMAP, 1998.

The development plan prepared by the new board confirmed that short term investment priorities had to address the improvement of the water distribution system rather than increasing the water quantity in the entire system. On the basis of more realistic and updated

90 Some of them to be built in caverns. 91 More than 400 MEuro in nominal prices at 1990. 92 In Italian it is the C.T.A.R (Comitato tecnico amministrativo regionale). It was the authority in charge of providing technical judgement on the public works to be realised in Sicily between 1994-1998 years.

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demand forecasts, assuming a steady rather than increasing population trend, this plan pointed to the need to redesign and adjust the capacity of the planned investments.

The push to the realisation of the investments under analysis came in 1994, when the Ministry of Public Works93 made available resources from the Community Strategic Framework 1994- 1999 - Objective 1 – “Enlargement and Adjustment of water supply and distribution infrastructures”, which however did not allow for the realisation of the entire Plan. After a long querelle about the suitability of and need for the underground gallery, the new board of AMAP94 decided not to undertake that component, and focus instead on the elements related to the distribution network. The timeframe for the project application did not allow for a complete redesign of the original plan. Therefore, taking a pragmatic approach, three lots of the original plan - concerning three sub-networks for which the executive projects were ready - were submitted to the Ministry of Public Works. The projects were approved on 15th November 199695 and entirely financed with public funds (50% from EU grants and 50% from national resources96). The beneficiary of the funding was the Municipality of Palermo, which entrusted AMAP with the responsibility for project implementation.

Following this first phase, the board of AMAP prepared five additional projects (taken from the Master Plan) and submitted them to the Ministry of Public Works for approval. Discussion between the European Commission, Ministry of Public Works and the Municipality of Palermo led to the decision that the projects were worth financing but asked for financial contribution from AMAP. Therefore AMAP applied to the European Investment Bank (EIB) for a loan of about EUR 23 million. The EIB played a key role in the history of the project: in order to better understand the rationale of the project and the needs it was designed to meet, it appointed an independent evaluator to carry out a field mission in Palermo. The results of this exercise pointed out that the water metering system in Palermo needed also to be improved and the EIB conditioned the loan decision on the implementation of a system of automatic metering, providing to this end an additional loan of EUR 13 million97.

The implemented project consisted of eight components, starting in 1997 and completed in 2004. Specifically, it includes:

• The completion of the Pedemontana pipe: this concerns the completion of the external bypass, to provide water from the Eastern part to the western part of the city. The works include the building of five tanks with an overall capacity of 60,000 m3 and their connections to the sub-networks.

• Rebuilding of six sub-networks: this concerns the replacement of six sub-networks (about 450 km of pipe, representing 50%, of the distribution network), mainly located

93 Now the Ministry of Infrastructure and Transport. 94 The new board took office in June 1994. 95 Ministry of Public Works, Decrees n.1, 2 and 3 on 15 November 1996. 96 National Funds were resources made available by C.I.P.E (Inter-Ministerial Committee for Economic Planning), the authority in charge of economic planning in Italy on behalf of the Ministry of Budget and Ministry of Treasury. 97 The loan was provided in five instalments between 2001 and 2008 and it is expected to be paid off by AMAP by 2020. However, not all the instalments were actually used for the interventions under assessment. Thanks to cost savings some of these funds were used for additional investments, such as new user connections.

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in the high densely populated area of Palermo (60% of population). These represented the oldest parts of the distribution network, dating back to the Nineteenth Century and experiencing the highest percentage of water losses. The leakages were mainly located at the mechanical joints (more than 200,000) of the old cast iron pipes which had decayed through time and corrosion.

• The supervision and remote control system: this concerns the provision of a monitoring system to check some fundamental parameters related to water distribution such as pressure, flow rate and quality of the water. It consists of the realisation of a Monitoring Centre inside the building of AMAP and 74 stations working at the crucial points of the distribution network.

The project financing decision was approved on March 199898 and works immediately started. The project forecast total cost was EUR 117.2 million, of which 40% (EUR 46.9 million) was expected to be provided by the EU, 40% by national public funds and 20% by the Municipality of Palermo (but ultimately by AMAP) through the EIB loan.

2.3 PROJECT IMPLEMENTATION AND ADDITIONAL INVESTMENT NEEDS The Ministry of Public Works was in charge of managing the funds and strictly supervised the whole construction works. A statistical analysis of the unit costs of water infrastructures99 prepared by the Ministry of Public works states that, while the average cost of water infrastructure per inhabitant on a sample of Italian projects financed in the same period was 272,547 Lire100, costs for the Palermo sub-networks ranged from 155,577 to 353,620 Lire, with an average cost (ex-post) of 237,754 Lire.

Among the cost items, the most expensive elements related to excavation and street works101 as well as the environmental cost of discharging the processed materials, while only 22-23% was related to the cost of pipes. Notwithstanding that, the material (high density polyethylene, HDPE) and processes used for the pipes were quite advanced, with a high level quality control system. A leading international company102 certified the quality of all the pipes and equipment. Although the materials were supplied from abroad103, Italian companies were contractors on the works. At that time, it was one of the first experimental attempts to use polyethylene pipes on such a large-scale water project.

98 Ministry of Public Works, Decrees n. 62,63,64,65 approving the financing for three sub-nets and the supervision and control system; Decrees n. 88 approving the financing for the completion of Pedemontana pipes. 99 Ministry of Infrastructures, General Directorate for the Networks, Proposta di un metodo di analisi statistica dei costi delle opere idriche, QCS PON ATAS 2000-2006: Quaderno tecnico N°7. 100 Equal to 140.76 Euro. 101 It is worth noting, for example, that streets in the historical centre were paved with marble blocks (most of them of the valuable Billiemi marble stone) which had to be numbered one by one and put back in the same position after excavation. 102 Bureau Veritas, see www.bureauveritas.com. 103 For example, Solvey provided the raw material to build the pipes.

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The investment timing was in line with the forecasts (only 18 months delay due in particular with the discontinuation of one of the contracts) and costs savings were recorded104. The actual project costs were lower than expected: EUR 88 million, corresponding to a cost saving of more than 20%. Reasons for the differences were that adjustments were made from the preliminary to the definitive and executive design and discounts were offered during the tendering phase. On top of that it is worth mentioning that during implementation no technical or other operational problems were encountered and several precautions minimised the impact on traffic and other urban functions.

After 2003, although further interventions were planned by AMAP to improve both the distribution network and the adduction system, only limited additional investments were made, none of them on foot of the Master Plan design. The original plan of a full restructuring of the entire water supply system and to significantly upgrade the internal technical and managerial capacity of the AMAP was then discontinued.

As far as the distribution network is concerned, spurred in by the improvement in the metering system implemented as part of the interventions under assessment, AMAP continued replacing old connections to the network and improving the metering systems. With regard to the adduction system, the following interventions have been realised:

• The building of a linking pipe between the “Rosamarina” reservoir and the purifying plant “Risalaimi”. The intervention was carried out in 2002 and included the building of a pipe, about 15 km long with a diameter of 900 mm, and reinforced concrete tanks with an overall capacity of 2,000 m3. Currently, this pipe is capable of carrying the water withdrawn from the Rosamarina west main (Rosamarina reservoir) to the purifying plant Risalaimi (built in 1967) at a flow rate of 500 l/s105. After treatment, the water is piped into the tanks located in the Eastern part of Palermo and then fed into the distribution system.

• The building of a linking pipe between the “Rosamarina” reservoir and the “Imera” purifying plant. It consists of the building of a pipe with a diameter of 600 mm and about 15.6 km in length, which allows the conveyance of water taken from the Rosamarina reservoir to the Imera purifying plant (located in the municipality of Scillato) at a flow rate of 400 l/ s. The treated water is then supplied to Palermo. The intervention became operational on September 2002.

• A third intervention has been undertaken but still not completed due to problems in the tendering procedure. This relates to the building of a desalination plant in the industrial area of Termini Imerese for the treatment of water taken from Presidiana

104 A recent Court of Auditors report (see the list of references: Court of Auditors, 2009) points to significant cost overruns experienced by the project. However, it was indicated, and reported in the response from the Italian authorities (Region of Sicily, 2010,), that the actual cost of works was in the end higher than forecasted because additional investments were undertaken and paid for by AMAP. This related in particular to about 100,000 connections to the main pipes that were provided together with other investments. Moreover, the Court of Auditors report was rather misleading on the indication of the total costs, referring to the financing decisions (based on the ex-ante forecasts) rather than on the ex-post recorded costs. 105 The project took advantage of the opportunity offered by the remaining capacity of the purifying plant that had a treatment capacity significantly greater than that the one which was used to treat the water brought to it.

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spring (located in Cefalù). The aim of this intervention was to increase the water flow to 600-800 l/s; this is currently limited to 140 l/s due to the need to mix it with the Scillato water to reduce the level of sodium chloride to drinkable levels.

Among the interventions planned in the rest of the network but never realised are the following:

• four projects were drafted for the complete replacement of other old sub-networks (Boccadifalco, Villagrazia, Brancaccio and Villa Adriana), in the same vein as the interventions already implemented. Two of these have been approved by the management board of AMAP but not yet realised.

• as already mentioned, in order to ensure an adequate feed to the sub-networks concerned by the project under analysis, the original Master Plan included the building of a large underground gallery including large pipes and wells aimed at feeding water into the sub-networks at adequate pressure levels. The intervention was discussed at length but never approved by AMAP.

• a further investment was scheduled to improve the feeder system of the sub- networks. It dealt with the building of a new tank (Pitré), with an overall capacity of 160,000 m3, to be placed in the middle of the city as a barycentre between the urban distribution network and the Pedemontana pipe. Its construction is still under discussion by AMAP.

The reasons for the discontinuation of this broad investment strategy are manifold but mainly relate to governance constraints (with a change in the AMAP board of directors), exacerbated by institutional conflicts in the application of the national reform of the water sector. The issue is extensively discussed in the concluding section as the key determinant of ex-post project performance.

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3 LONG-TERM DEVELOPMENT EFFECTS

This section presents the assessment of the long-term effects produced by the project, firstly, by summarising the effects produced under the seven categories106 identified in the First Interim Report, and then, by discussing the most significant ones, especially in terms of effects on different stakeholders and the levels at which the effects are produced.

3.1 KEY FINDINGS Evidence shows that the water supply project in Palermo produced positive and significant effects mainly in terms of improvement in the quality of life of citizens. In particular, after project implementation a more reliable and secure service provision was ensured for most of the municipal population. This effect is expressed in terms of direct welfare and growth effects, indicated by the reduction in complaints and monetised via the avoided costs of domestic and industrial users due to the improved water service. Growth improvements relate also to the increase in the management efficiency of the municipal company, given the avoided maintenance and operating costs required in the old network. Minor effects are recorded in terms of growth, represented by higher productivity of commercial and industrial users in the city benefitting for better water provision. These effects were however not quantified. In fact, the relationship between the improvement in the reliability of the water service and the increase in the productivity of economic activities is rather loose and difficult to establish from a quantitative point of view.

Table 3.1 SUMMARY OF NATURE AND STRENGTH OF IMPACTS Strength* Level 1. Direct welfare and economic growth +4 Local 2. Endogenous dynamics +3 Local 3. Social cohesion 0 - 4. Environmental effects +1 Local 5. Territorial cohesion 0 - 6. Institutional quality 0 Local 7. Social happiness +5 Local *-5 = very strong negative effect; 0 = no effect; 5 = very strong positive effect (the criteria considered to assign the scores shown by the following Tables are presented in Annex I).

In addition, it is worth noting that it was possible to have a continuous water provision even before the project, by making use of tanks and electric pumps, in particular in commercial and industrial buildings. Therefore additional effects in terms of impact on human health or

106 Direct economic growth, endogenous dynamics, social cohesion, environmental effects, territorial cohesion, institutional quality, social happiness.

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increased productivity benefiting segments of the economy that depend on clean water do not apply in this case107.

Short term growth effects were also recorded by the companies and experts which were contracted for the execution and supervision of the works, who also benefited from development of technical capacity due to the innovativeness of some of the techniques used to implement the project. These effects however did not translate into long-term effects.

Additional effects are in terms of endogenous dynamics and are represented by the improvement in the service provided, knowledge base and capacity, with an effect in terms of improved management system.

Intangible effects are also recorded in terms of social happiness due to the sense of confidence and comfort in users and citizens enjoying, after such a long period of water rationing, a continuous water delivery.

All these effects are relevant at the local (municipal) level, and the key stakeholders affected are citizens and employees of the municipal company.

Table 3.2 IMPACTS* ON DIFFERENT STAKEHOLDERS STAKEHOLDERS EFFECTS Service Residential Commercial Government and citizens provider users and Local Regional National industrial users 1. Direct welfare and economic +3 +4 +4 growth 2. Endogenous dynamics +3 3. Social cohesion 4. Environmental effects +1 • 5. Territorial cohesion 6. Institutional quality • 7. Social happiness +5 +5 *-5 = very strong negative effect; 0 = no effect; 5 = very strong positive effect, •= expected effects which did not materialise (the criteria considered to assign the scores shown by the following Tables are presented in Annex I).

It is however worth mentioning that a number of potential positive effects did not materialise because of the discontinuation of the investment plan. The most significant among them relates to the reduction of water losses, which are still at a rate of about 47% of the total water fed into the system. Although continuity of water supply was the key objective of the interventions and water losses were instrumental in the achievement of such an objective, it still represents an indication of inefficiency in the water delivery system and places the

107 For example, hotels and tourist accommodation were provided with pumping systems, and therefore no additional indirect effects, other than the reduction in the private costs of operating the pumping systems, can be recorded.

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Palermo water supply among the worst performers in Italy108. The only, minor, environmental effect is in terms of a slight improvement in water quality.

In addition, a missed opportunity relates also to the adoption by AMAP of an advanced system of long-term asset management planning according to best international practice109, i.e. the adoption of a systematic investment planning approach balancing capital and operating expenditures. Under this approach an in-depth analytical understanding of the key performance indicators of the water network and the application of technical planning modelling should be the basis for long-term planning strategies. In order to do so, the capacity to fully monitor and meter network performance should be in place, together with a strategic and planning capacity at managing board level. Some of the planned and unrealised interventions as well as an in-depth renovation strategy within AMAP (selection of high-level technical expertise, support of advanced managerial skills), which was ultimately discontinued, were necessary for the achievement of such an ambitious objective.

Table 3.3 TEMPORAL DYNAMICS OF THE EFFECTS* Effect Short run Long run Future Comments (years 1-5) (years 6- 10) years 1. Direct + ++ ++ Most of the positive benefits of the users economic materialised in the short term, while the gradual growth reduction of operating costs of AMAP has required a longer time. 2. Endogenous + ++ ++ Service provider improved its internal capacity dynamics and know-how, thanks to the new ‘demand- driven’ management as opposed to the old ‘supply-driven’ one. 3. Social 0 0 0 No effect. cohesion 4. + + + Slight improvement of water quality, no effects Environmental on water losses, which are still high. effects 5. Territorial 0 0 0 No effect. cohesion 6. Institutional 0 0 0 Missed effect. quality 7. Social + + + The citizens of Palermo went from public happiness protests and riots due to serious water rationing periods and service discontinuities to "not remembering" the water problem. Immediate large benefit to users. *+ = slight positive, ++ = positive, +++ = strongly positive, +/- = mixed effect (the criteria considered to assign the scores shown by the following Tables are presented in Annex I).

108 See ISTAT, 2009, Censimento delle risorse idriche a uso civile, Anno 2008. 109 See for example the indications provided by Ofwat, the UK water authority (http://www.ofwat.gov.uk/pricereview/pr09phase2/pr09phase2letters/ltr_pr0923_amabaselinesetting).

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3.2 DIRECT WELFARE AND ECONOMIC GROWTH The welfare of citizens in Palermo positively changed after project implementation. Before project implementation residential users had to spend their own money to buy, operate and maintain water tanks which collected water during the time when the water supply was turned on, to be used during the days when water was not available; families had to spend time making sure of their water supply, by promptly performing the necessary tasks, on the days when they had supply; users had to incur the extra costs of repairing faults in home water systems and in household or industrial equipment, due to malfunctions in the municipal water system. However, during the periods of water shortages and severe droughts (especially in the years 1989-1990 and 2001-2002) the tank system was not sufficient to provide water to the population, and a system of public water distribution was organised.

During these periods the frustration and inconvenience felt by Palermo inhabitants was extremely high. In these periods the population had, in term of water fed into to the whole urban network, a total of 70 million m3 of water per year, corresponding to a gross 282 l/d per inhabitant and to a net consumption of 173 l/d/inhabitant. After project implementation (2003-2010) the water fed into the water network rose to 88 m3 on average per year for an individual gross availability of 360 l/d and an actual consumption of 190 l/d.

The project implementation did not actually solve the problem in all the city districts: 25% of the network (corresponding to almost 25% of the total population) is currently still subject to regular disruptions. This is the part of the network which is in such a state of obsolescence that continuous water pressure would generate incessant breaks in the pipes and further disruptions in the service.

In addition, it has to be mentioned that tanks and electrical pumps are still being used in tall buildings to bring water to the upper floors (water pressure is still too low to enable the provision at higher floors). Tanks fed by electrical pumps still exist and are operated. However, activities related to these are not time-consuming given that users do not have to take into account the rationing time, as the public supply system is always in operation (users do not now even realise that water is being supplying by tanks).

Therefore, the current situation is much better than previously, and the current system is expected to be able to cope with possible future droughts should they occur, thanks also to additional investments in the water supply system undertaken after the project’s implementation110.

As a result, the social benefit of the improved water service delivery has been quantified and monetised in the CBA in terms of avoided costs. They relate to three different complementary aspects:

110 However this depends on the severity of the drought episode. In cases of extremely severe droughts it may be possible that the obsolescence of some of the network sections could cause water shortages and, in the absence of additional required interventions, water rationing could still be the only solution in extreme cases.

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• time savings of users who no longer have to collect the information about days and hours of water rationing and manually operate pumps and water system at the right moment during the rationing time, corresponding to an estimated benefit of about EUR 13 million on average per year. This is by far the largest benefit relating to users’ inconvenience in having turned water instead of a continuous service;

• avoided costs of purchasing, maintaining and operating electrical pumps (in terms of electric power and maintenance costs) for the share and typology of population (civil or industrial users as well as those living in high apartment blocks or in small houses111) impacted by the effect. The estimated benefits amount to about EUR 2.6 million per year on average.

• the avoided maintenance costs for domestic and commercial/industrial appliances connected to the water system (e.g. washing machines) suffering major operating inefficiencies due to the turned water supply (about EUR 205,000 on average per year).

These long term effects (arising soon after project completion, in 2003, and still in place today) will be maintained as long as infrastructural investments and management capacity ensure that proper development and management of the entire water network is maintained. However, the current situation is not particularly promising in this respect: after the interventions under examination, few other interventions were implemented, mainly related to adduction and not the distribution system, while some of the already planned interventions related to the renovation of additional sub-networks were interrupted, notwithstanding availability of finance and a commitment already in place (see next Section for further details).

A more efficient use and distribution of water resources affects not only residential users but also industrial and commercial ones. The cost savings related to water availability in such cases provide efficiency gains. Such effects materialised soon after project implementation, however no quantitative data are available on this aspect.

An efficiency gain is recorded by AMAP itself, due to savings in maintenance costs related to the distribution network. After project implementation the newly built pipes, constituting 50% of the entire network, no longer need the demanding and frequent repair interventions required previously. Moreover, the new system does not require demanding daily manual adjustments, regulating water pressure in the pumps and adjustments according to a supply- driven type of management. By ‘supply-driven’ water management we refer here to the centralised delivery system in operation before project implementation, which was aimed at regulating the total water volumes pumped into the system, based on water availability and the efficiency of the pipe operations. In fact, large teams of specialised employees were needed daily to monitor and intervene on pipes breaks, pressure problems and other related activities. After project implementation the delivery system became a ‘demand-driven’ water management system, where the key driver is water consumption by users. The water fed into

111 Data about share and typologies of users were provided by AMAP while the quantification of costs has been made by the authors on the basis of data available in the literature and interviews to sector experts.

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the system is now required to accommodate actual consumption (and not the other way round); therefore more accurate planning and metering systems are needed, while less specialised manpower is needed to manually operate the pumps and piping system.

This is a long-lasting effect that materialised soon after project implementation. It has been quantified, monetised and included in the CBA and amounts to a cost saving of more than EUR 1.5 million on average per year, a financial benefit which is included in the CBA for the calculation of the financial profitability of the project. In terms of social benefit this effect is however lower: in the economic analysis labour force is corrected using a conversion factor lower than 1 to take into account the social benefit of employment, therefore a cost saving for labour in the economic analysis has a lower value112, reflecting the loss of socio-economic benefit due to lower employment.

It is worth noting that, according to the AMAP balance sheets, internal reorganisation of human resources included both a decrease in total manpower and a more than proportional decrease in the manpower used for the operation of the distribution network. Notwithstanding some rigidities in the internal restructuring process113, additional efforts are now focussed on activities related to service management and administration rather than physical repairs. Among the activities that were recently promoted in AMAP are the following:

• Research activities related to water metering;

• Replacement of the old connections and metering system in order to improve the effectiveness of water metering and billing capacity;

• A campaign against illegal connections and unpaid bills;

• Customer satisfaction surveys now systematically carried out.

Evidence regarding these activities is provided in the section below.

3.3 ENDOGENOUS DYNAMICS Strictly related to the previous effect, the project implemented brought about an improvement in terms of management knowledge and capacity, such that the internal capacity of AMAP benefitted greatly from its implementation. First, additional internal resources were freed up to be invested in alternative, higher level, activities. Second, the improved distribution system shifted the attention of management from the problem of water availability to one of water made available to users, and therefore on metering and billing, with an improvement in management quality.

112 The discounted value of the difference between the financial and economic benefit amounts to almost EUR 10 million.

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Box 3.1 ENHANCED RESEARCH CAPACITY IN THE FIELD OF WATER LOSS CONTROL During the years 2007-2008 AMAP carried out research on administrative water leaks in the urban water networks of Palermo, in collaboration with the Hydraulics and Environmental department of the University of Palermo. At research level the interest in apparent or administrative water leaks is rather new114. Apparent leaks may be caused by water stealing115, reading and billing mistakes on water meters116, or problems of under-measurement. These problems are caused either by the ageing of the meters or by intentional manipulations by consumers. As far as the ageing of meters is concerned, the older the meters are, the higher the range of start-up117 is. As regards consumption, private water tanks increase apparent water leaks: they generate a lamination effect which tends to reduce water volumes. The available literature had already highlighted the relationship between the ageing of meters and their measurement performance, but the relationship between private water tanks and under- measurement by meters was a new research strand. In order to investigate the issue and to definitively solve the problem related to the excessive difference between the water volume introduced into the network and the water volume billed, which persisted after the realization of new water networks in the city, AMAP conducted experiments and tests. First they tested the variation in measurement accuracy of meters in relation to different ages of meters on a sample of 700 meters118. Then they tried to estimate the lamination effect generated by private tanks on water volumes considering five different types of users. Consequentially they tested the effect of the UFR device119 which reduces the lamination effect of the private tanks. The outcomes confirmed the results of previous studies in that the average of the range of start-up and the average of the measurement mistakes increases as the age of the meter increases. Moreover the measurement accuracy of the meters also depends on the manufacture of the meter and on the quality of the water. Regarding the tests on the lamination effect exercised by private tanks, researchers found that the effect was stronger in the case of a continuous water supply: the lamination effect of the tank limits the opening of the floating valve in the water tank. This, together with the high level of the range of start-up in cases of low capacity, often generated high levels of measurement mistakes. These studies led the researchers to specific conclusions on the issue of apparent water leaks120: - meter ageing and the presence of private water tanks are the main causes of apparent water leaks; - the replacement of old meters with new meters121 is the best strategy to decrease apparent water leaks; - the use of the UFR valve is not a good strategy since it is less efficient when applied to new meters, moreover its long term effects are unknown and it is a device under patent that is produced by just one firm in Italy; - it is preferable to undertake meter replacement by district in order to fully realise results in terms of

114 Water leaks consist of the difference between the water volume introduced into the water network and the water volume legally consumed by users. They can be divided into real and apparent leaks. The first are physical water leaks in the water distribution system. The second are also called administrative losses and, they consist of volumes of water that are not legally consumed by users and all types of measurement errors. More specifically, these volumes of water are consumed but not paid for by users, generating economic losses for the municipality. See also Figure 1.4. 115 Water stealing is the consequence of illegal connections to water networks, bypassing of meters and the voluntary manipulation of the same. 116 Reading and billing mistakes are the consequences of human mistakes: data are not read correctly and so are wrongly managed in the billing system. 117 The range of start-up is the minimum level of water volume registered by the meter. That is the level from which the meter starts to register the quantity of water consumed by the user. 118 The test was divided in two phases: first they tested 180 meters and subsequently they extended the sample to 700 meters. 119 The UFR (Unmeasured Flow Reducer) is a device invented in Israel. It is a valve which modifies the filling process of the water tank. In particular it is installed in the upstream or in the downstream part of the meter and changes the way in which the water circulates in the meter: in the case of low water capacity, the UFR transforms these levels of water volumes in level of capacities that overcome the range of start-up of the meter, while in the case of high water capacity, the valve does not operate. 120 See Giuseppe Arcuri, 2009, Analisi delle criticità e individuazione delle esigenze operative finalizzate alla realizzazione dei sistemi di misura della adduzione e della rete di distribuzione idrica urbana. 121 More specifically, the replacement of all meters that are more than ten years old.

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fees recovery. After the experiments AMAP improved its knowledge of the nature of the difference between the volume of water injected into the network and authorized water consumption. The experiments will also be expanded and a cost benefit analysis on the measurement accuracy of meters, on their replacement costs and on other variables (water price, the presence and the influence of private tanks, the costs and the efficiency of UFR valves etc..) will be developed122. Source: Authors

The automatic monitoring system and the new connections to the main pipes drew attention to the fact that, although physical water losses were practically non-existent in the new pipes123, a high percentage of unbilled water124, as compared to the volume of water entering the system, was still being recorded. Investments were made in order to develop knowledge and capacity to improve the performance and effectiveness of the metering systems and research studies were carried out in this regard.

3.4 INSTITUTIONAL QUALITY In relation to the increased management quality of the service provided it is worth noting that a taskforce was put in place by AMAP to manage the problem of unpaid bills, and benefits were achieved via collecting additional revenues. The problem of unpaid bills is also related to illegal connections and water theft. In this regard a public campaign was recently promoted in order to raise public awareness, especially in schools, about the need to ensure legality in the use of water resources125. This campaign was also promoted during a national forum on water supply held in Genoa in September 2011126.

Our commitment in terms of ongoing projects and undertakings cannot set aside the awareness that only by promoting the value of legality and a culture of civic respect will it be possible to promote water and its correct use, in terms of quality and saving as well as by accepting a fundamental principle: do not use tricks and wits to get water. Source: Vincenzo Cannatella, AMAP President, during the Water Festival127

Although this is an interesting example of the potential institutional quality improvement a water project may bring about, in the case of the Palermo water supply system the aspect of institutional quality (of municipal and local authorities) did not materialize in a significant manner. On the contrary, this is an unrealized benefit.

3.5 ENVIRONMENTAL EFFECTS One of the main expected benefits of the project under assessment was to reduce water losses, which accounted for about 47% of the total water pumped into the system before

122 Fantozzi M., Criminisi A., Fontanazza C. M., Freni G., Lambert A., 2010, Le perdite apparanti dovute alla sottomisurazione dei contatori domestici, in Servizi a Rete, N°2 March – April. 123 Some pressure problems in the new sub-nets (the Politeama net in particular) are at the basis of some still occurring disruptions causing complaints from users; however they are usually quickly repaired and cause no significant losses. 124 This percentage is unchanged as compared to the situation before the project. 125 http://www.amap.it/campagna.asp?id=61. 126 http://www.festivalacqua.org/. 127 See http://www.festivalacqua.org/?p=1151#more-1151.

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project implementation. This would have produced an environmental benefit due to the saving of a scarce natural resource such as water. In particular it was expected that reduced losses would result, without affecting the quality of service while meeting the water needs of citizens, in less anthropical pressure on natural water resources, especially on groundwater, thereby reducing the volume of water pumped from the numerous wells.

After project realisation virtually no physical losses were recorded in the new sub-networks. However, the water saved in the new sub-networks is used to ensure continuous pressure in the entire system (including the rest of the old network, with the exception of 25% of the pipes which are too obsolete to bear continuous pressure). Because of this, the old pipes, now put under pressure for 24h/day, are losing more water than previously, so that the total quantity of water losses did not change subsequent to project implementation. Management decided to eliminate supply disruptions rather than take the benefit of reductions in water losses, thereby increasing the quality of the water service rather than improving environmental sustainability.

This managerial choice is in line with the global objective of the project, according to which the reduction of water losses was an instrument to achieve better service provision, rather than the ultimate goal of the intervention. However, the remaining water losses represent an inefficiency in the current system which would need additional investments to be solved. These interventions should address the obsolescence of the remaining sections of the urban water network via pipe repairs and replacement, according to a design which should be specifically developed. There is in fact no scope for completing the original Master Plan, which sufferings from design shortcomings such as for example the overcapacity of the pipes and tanks, due to overestimation of demand forecasts. Moreover, the field of water losses control has developed significantly in the recent past128 and it might not be necessary to replicate the same technical solutions adopted by the interventions implemented in the period 1997-2003, as more effective ones are now available129. This can imply for example a combination of replacing entirely some of the most obsolete subnets together with an operation and maintenance plan aimed at substituting some parts of the remaining nets, together with the adoption of measures to zone the networks, and to reduce the pipe pressure, including installation of automatic control devices and of other management measures. There is a scope therefore for a new plan to be developed, making use of state-of-the-art scientific knowledge

128 See in Annex V the list of references for a literature review on water losses control. 129 Based on technical and scientific literature (e.g., Farley M. and Trow S., 2003), the optimal control of water losses can be achieved by an appropriate mix of four categories of activities, the so called ‘Four pillars of Leakage Management’: Pressure management, Active leakage control, Infrastructure management and Speed and quality of repairs. The most appropriate leakage control policy will mainly be dictated by the characteristics of the network and local conditions. The main factor governing the choice, however, is the value of the water, which determines whether a particular methodology is economic for the savings achieved. Therefore, there is always a level of leakage which has to be tolerated, and which has to be managed. In fact, for any water distribution system there is a level of leakage below which is it not cost effective to make further investment, or use additional resources, to further decrease the leakages. In other words, the value of the water saved is less than the cost of achieving a further reduction. This point is known as the economic level of leakage (ELL). Leakage targets based on ELL must therefore be specific and dynamic. The choice of the proper target level of leakage, as well as the development of a program of actions and investments to be undertaken to achieve and maintain it during the course of the water service through the years, must be based on extensive knowledge, both physical and functional, of the water system, which the service supplier may acquire through extensive and accurate surveying and studies of the networks, including physical and topographic mapping of the networks, customer investigation, development and calibration of hydraulic models and precise water balances, hydraulic simulations to identify the critical water loss areas, leakage research and monitoring, metering campaigns, etc.

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to address the current problems. As a rough indication, the Three years Operational Plan of AMAP estimates current investment needs amounting to EUR 13 million, to which have to be added EUR 1.5 million per year for the scheduled maintenance of the network. In addition, the rehabilitation of the entire network will be completed with the construction of the Pitré tank, the investment cost of which (originally estimated at about EUR 30 million) can be significantly reduced according to more updated and realistic figures of the expected water consumption.

A slight environmental effect is recorded in terms of improved water quality. This is not a direct but rather a side effect of the improved quality of the water distribution network. A decrease in the pipe disruptions reduces the chances for water contamination. At the same time, however, the not fully suitable supply system of the new sub-networks (expected to be replaced as part of the original plan but not actually completed) at times produces too low a water speed, leading to water deposit in the pipes which is then delivered to users when the pressure normalises and the water velocity in the pipes increases. As a result, a swinging complaints trend related to the quality of water is recorded. This effect is long-lasting and directly related to the project’s implementation. However it is a secondary, relatively insignificant effect, which was not quantified in the CBA.

3.6 TERRITORIAL AND SOCIAL COHESION The project did not produce significant effects in terms of either territorial or social cohesion. Although the project was implemented in one specific area of the city the effects spread to the entire municipal territory. In terms of social cohesion the project did not have significant effects on vulnerable groups, although some improvements in the quality of the water service were achieved in the most socially fragile districts.

3.7 SOCIAL HAPPINESS During the most severe drought episode, citizens of Palermo suffered such severe inconvenience, that street protests caused problems of public disorder (for example, in June 2002 protesters occupied the city Cathedral) 130. Private water tanks were not adequate, and citizens as well as public buildings were supplied by tanker131. It was recorded for example that in the municipal prison detainees were only allowed to take a shower twice per week.

130 See: Siccità: Palermo è a secco e la protesta diventa rivolta. (La Repubblica, 14 May 2002); Torna la guerriglia urbana nella Palermo senz'acqua (La Repubblica, 4 June 2002). 131 Each tanker charged 27 Euro for private users, and was free for public users (Source: I cittadini senz'acqua occupano la cattedrale. (La Repubblica, 5 June 2002)

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Figure 3.1 STREET PROTESTS DURING A SEVERE DROUGHT IN 2002

Source: La Repubblica.it

Project implementation had a positive and significant effect in terms of social happiness, in terms of the sense of confidence and convenience derived from having a continuous water service as well as the sense of social pride from living in a municipality ensuring a certain quality level in a basic utility service.

Figure 3.2 TREND IN COMPLAINTS RELATED TO THE WATER SERVICE

35,000

30,000 For losses For water quality For the service delivery 25,000

20,000

15,000

10,000

5,000

0 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: AMAP, Customer Satisfaction Survey

Citizens acknowledged the almost surprising improvement after the project’s implementation. Since 2003 no similar events have occurred and satisfaction with the water supply system has improved. The customer satisfaction survey carried out by AMAP shows a decreasing trend of complaints.

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4 DETERMINANTS OF PROJECT OUTCOMES

In this section the key determinants of the long-terms effects discussed in the previous chapter are illustrated and discussed. After a brief presentation of the key messages, each significant determinant is presented and evidence and arguments supporting the findings are presented.

4.1 KEY FINDINGS The project was the right initiative in the right place and at the right time. The appropriateness to the context was in that regard very high, since the interventions appropriately responded to a pressing and widespread need of the population. This has already been discussed and illustrated in the previous sections.

There is a shared opinion regarding the fact that the governance structure of the project played a determining role in shaping the project’s long term performance. It actually provided a mixed contribution. In the initial phase it was the key factor boosting project implementation thanks to a happy combination of political will and high technical capacity. In the second phase of the project however, this positive effect lost momentum and the governance structure was less effective in overcoming a series of institutional constraints which actually determined the longer term impasse in the project. Managerial response in this case is included in the governance structure dimension since AMAP’s capacity to promptly react to the changing context is embedded in the interplay of governance actions.

Project design and forecasting capacity are an interesting aspect of the project. Despite the technical capacity put in place in the original design, some controversial aspects could still be identified. The first relates to the appropriateness of the underground component already discussed in Section 2, while the second relates to the overestimation of demand. Neither of these aspects hampered the chances of the project producing positive results, but they reduced the actual benefits produced.

Table 4.1 IMPACT OF KEY DETERMINANTS ON PROJECT’S PERFORMANCE Strength* 1. Appropriateness to the context +4 2. Project design +2 3. Forecasting capacity +1 4. Project governance ±5 5. Managerial response ±5 *-5 = very strong negative effect; 0 = no effect; 5 = very strong positive effect (the criteria considered to assign the scores shown by the following Tables are presented in Annex I).

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4.2 PROJECT DESIGN AND FORECASTING CAPACITY Notwithstanding it proved to be quite an advanced intellectual exercise and well-qualified professionals were involved in it, the original design of the Master Plan presented at least two major weaknesses. The first relates to the component addressing water provision and the proposed solution of a highly expensive and technically complicated underground gallery to be used to feed into the distribution network. This solution caused some controversy among the experts since not everybody was convinced of the real need of it. In particular, on one hand doubts were raised about the supposed water need, which for some experts was rather overestimated (see also below) and did not justify such a huge adduction system. On the other hand, there was a common view that distribution rather than adduction was the key limitation in the system, and therefore renovation of the pipes in the sub-networks was a priority as compared to other interventions.

At the time of the project implementation, administrative and technical limitations imposed on the AMAP board a more pragmatic approach to the problem, and due to financial availability and the short timeframe for presenting the application for co-financing, it was decided to start with the sub-network components, thus overlooking the gallery component. As part of a wider strategic infrastructure plan, the approach the management board had in mind was to adjust the project design at a later stage, and to include additional interventions aimed at rationalising also the adduction system, without implementing the gallery solution. However, when the management board changed, this long term strategy was discontinued and the realised components appeared as necessary but fragmented interventions.

If I had to implement the project now I would take some more time to prepare a proper design. But we did not have this chance, we had to rush and the executive design was already approved, so we did our best with the available resources and information. In any case the project was implemented and it survived several administration changes so from this perspective it is a great success. From a broader perspective however it reflects some missed opportunities. If I had a magic wand I would first change the people, then the project design. Source: Interview report

Another weakness of the original design relates to the overestimation of water demand. A major forecasting error was made in this respect, in particular as far as the demographic trend was concerned. In fact, demand analysis made ex ante was based on the assumption of a demographic increase, notwithstanding an already stagnant population. It was assumed that the urban regeneration initiatives undertaken by the administration at that time would have brought inward migration to the historical centre. Not only did this not happen, but a negative demographic trend was experienced.

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Figure 4.1 FORECASTED AND ACTUAL POPULATION GROWTH IN PALERMO

1,000.00

900.00

800.00

700.00

600.00 Actual data and updated forecasts Forecasts in ex-ante CBA 500.00

400.00 1992 1997 2002 2007 2012 2017 2021

Source: Authors on ex-ante CBA and ISTAT data

On top of that, the forecasts of per capita water consumption after the project were also overestimated, being almost double the actual value. This stems from the assumption that with a more reliable delivery system people would significantly increase their water consumption; however this did not hold true, since the improvement in the service quality translated only into better quality of life for citizens (more reliable water consumption) rather than an increase in quantity demanded.

Table 4.2 FORECASTED AND ACTUAL WATER CONSUMPTION, M3 Years Actual Forecasted 1997 88,580,573 95,300,000 2002 70,786,916 117,800,000 2007 89,675,294 110,100,000 2012 113,700,000 Source: Authors on ex-ante CBA and AMAP actual data

These demand assumptions were however rigid from a planning point of view, since they were prepared in accordance with the regional Master Plan of the Waterworks132, in force at that time in Sicily, a basic programming document binding for each aqueduct project, and that only in recent years has been reviewed (the new version is currently still awaiting final approval). This plan indicated a target of 432 l/inhabitant/day for water consumption (the actual figure is 190/l/inhabitant/day) and an increasing population growth. Therefore, demand forecast analysis was not prepared specifically for the Master Plan but in compliance with this mandatory condition.

The impacts on the project are manifold and relate to an overall overcapacity in the new pipes and tanks. Given that the cost of pipes represents a share of around 22-23% of the project

132 Piano Regolatore Generale degli Acquedotti (PRGA), 1963.

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total cost (as already mentioned in Section 2), the impact of the larger pipes required by the demand overestimation (leading to pipes of a larger diameter) has been quantified at about 5- 6% of the total costs. The impact on the tanks and adduction pipes is however larger, both in terms of costs (tanks investment costs are proportionate or even more than proportionate) and of management efficiency. For example suboptimal water pressure and speed levels cause quality and pumping problems.

We knew the figures for future water consumption were not realistic, we were not confident about them, however no one would have approved a project with figures not complying with the Plan and we were forced to use those figures. The impact on project costs is however not significant. Source: Interview report

The board of AMAP during project implementation was aware of the limitations of this forecasting exercise and tried to minimise its impact on the project. For example, it was decided not to undertake the element of the underground gallery deemed not strictly necessary. Within the intentions of the long-term company development plan there was an idea to adjust and redesign some of the components of the original Master Plan, in particular those related to water adduction; however a change in management stopped the implementation of the broader strategy.

4.3 PROJECT GOVERNANCE Evidence and opinions collected with the present analysis support the assessment of the project governance structure being a key project determinant. The governance structure of the water supply system in Palermo is rather simple, but if assessed from a long-term perspective, the relevance of the interplay between three different dimensions affecting governance performance is clear. These are in particular:

• Political will and commitment

• Technical and managerial capacity

• Institutional framework

• Financial resources

As already mentioned, the water supply service in Palermo has long suffered from mismanagement and the influence of organised crime. The lack of proper urban planning (with some cases of property speculation episodes) during the period of the city’s expansion caused the first stress on the development of the physical water infrastructure, which followed the westward expansion of the city and resulted in fragmented actions mainly aimed at making more and more water available to the system.

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Figure 4.2 GOVERNANCE STRUCTURE OF THE WATER SUPPLY SYSTEM IN PALERMO European Institutions

European European Investment Bank Commission

National Government

Ministry of Public Works

Sicilia Region

Other municipalities Municipality OTA 1 in the province of of Palermo Palermo Palermo

Acque potabili AMAP Siciliane s.p.a. (APS)

Palermo water supply system

* OTA1 enters into the project’s governance after the project implementation Note: Dashed lines are used to indicate past/temporary responsibilities or tasks. Source: Authors

There was a shared opinion that dry weather was the primary source of water shortages, while inefficient management of the existing infrastructure was a more critical aspect of the story, as the study carried out by AMAP in 1978 revealed (see Section 2).

Regarding the water problems, the attention of people of Palermo has been skilfully diverted towards the sun: they are more used to scrutinizing the clouds rather than the municipal council and to get angry with the weather instead of with the municipal company management. Source: Giuliana Saladino, quoted by Gabriello Montemagno in Repubblica.it, 28 July 2008.

The political, cultural and institutional context underwent a radical improvement in the middle of the 1980s. The water supply project in Palermo was implemented during the so-called Palermo Spring (Primavera di Palermo) or Palermo’s Renaissance, a period characterized by a deep cultural and political renewal133 and in particular by a strong emphasis on civic renewal and the fight against organised crime. From a political and institutional point of view this

133 The period is recalled as being characterized by a euphoric mood in and around city hall. (Source: Schneider, Jane C., Schneider, Peter T., 2003, Reversible Destiny: Mafia, Antimafia and the Struggle for Palermo, Paperback, University of California Press, California).

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period represents a total break with the past and the improvement in quality of life and public management were tangible effects134.

Box 4.1 THE PALERMO SPRING The city administration, under the inspiring leadership of Leoluca Orlando135, elected mayor of the city for the periods 1985-1990 and re-elected for the period 1993-2000, strongly committed to promoting and valorising the image of the city in Italy and abroad after a period of growing mafia power. Much effort was put into improving citizens’ quality of life with a number of urban regeneration actions, especially in the historical centre, and investment for public local services. Civic renewal of the city was supported by promoting multi-faceted cultural and educational school-based initiatives, in particular to promote the principles of legality and civic pride, in connection with the fight against organized crime136 and the promotion of the antimafia movement within local society. According to press articles many public contracts to companies suspected of being connected to criminal families, especially related with the maintenance of public facilities, were discontinued. As the former mayor puts it: in 1985 when I became mayor for the first time I asked the secretary general for the municipal budget, but we did not have one, meaning we did not know what was owned by the municipality and where the assets of the city were. In 2000 Moody’s gave us Aa3, like Stockholm, Boston or San Francisco137. Source: Authors

In 1983 all the private wells supplying the Palermo system were seized and expropriated by judicial power. The management board of AMAP was firstly renewed in 1989 and subsequently radically renewed in 1994 when almost all the managing directors retired138.

In a break with past practices, the management board and president of AMAP were selected through a public, open and transparent, recruitment process. The experts appointed to the Board were selected solely on the basis of their professional profiles. It has been acknowledged by all the interviewees that the team of experts involved in the project, both at municipal and at central level, included some of the best available water engineers and technicians in Italy and that the technical capacity deployed was unprecedented.

134 All the interviewees recalled that period as a ‘magic moment’. 135 An Italian politician, lawyer and Professor of Law at the University of Palermo, best known for his strong opposition to the Sicilian Mafia. “Leoluca Orlando, a former Christian Democrat who broke with his original party’s Mafia-linked old guard in 1987, was a courageous, dynamic and above all uncorrupt city boss in Palermo until he stood down a few months ago to run (in vain) for president of the island’s regional government”. Source: The Economist, July 5th 2001. 136 Palermo is spending a fortune on establishing itself as a centre for cultural tourism, mounting hundreds of musical and theatrical events. Many of its buildings have been beautifully restored. Those tourists who come say they feel safe. Yet it will be many years before the city sheds its worldwide reputation as the city ruled by the Corleone family. Source: The Economist, Nov 6th 1997. 137 Source: http://www.qualitas1998.net/qualityreport/20020514.htm. 138 At present and for a long time, there has been no evidence of involvement, even marginal, of organised crime in the management of water services in Sicily.

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For the sake of clarity it has to be stressed that, solving the central problem of reducing water losses in the network requires a long-term commitment centred both on the replacement of the most degraded sections of the distribution network, a research effort to identify continuing losses in the remaining sections of the network (manageable with internal company resources), and a complete company restructuring emphasising the centrality of operational departments and reducing the current organisational contradictions. Source: Piano Programma, 1998

The board committed to a long-term strategy of company renewal under the guiding principle of ensuring a certain quality of service provision to the citizens. Spurred on by the rationalizations introduced with the new legislative framework of sectoral reform (1994), the company development plan aimed at promoting an advanced asset management system and an overall improvement in the effectiveness and efficiency of AMAP performance. Under this framework the planned investments were merely a short term priority to solve the urgent needs of the population. The enhancement of internal resources, in particular by improving the technical and operational capacity139, was a key enabling factor.

Box 4.2 THE AMAP PERFORMANCE The performance of AMAP, as compared to similar companies in Italy, was not particularly good, especially under the profile of labour productivity. This partly reflected the fact that, as highlighted in previous parts of this report, its management practice has been characterised for long time by political clientelism and poor professionalism. A benchmarking analysis140 carried out on selected water service providers in Italy highlights the performance of AMAP as compared to other water companies in the period 2003 – 2005 under some aspects of infrastructure management and financial structure. Although the period of this analysis relates to years after the project implementation, the results are still indicative of the main problems in AMAP141. The figure on the turnover per employee is the most striking, being the lowest one and more than a half of the average figure of the sample. It is worth mentioning that the current performance of AMAP is better under some of the aspects indicated in the table. For example, according to the AMAP balance sheets, in the year 2010 the personnel costs were 44.9% of the total operating costs. In the same vein, it is likely that the performance of AMAP at the time of the new management appointment was more critical than the one depicted in very broad traits in the table below. The technical and professional profile of the new AMAP board was a totally new element in the project’s scenario. The strategic ambition of the managerial board spread far beyond the mere intention to undertake the water network investments, but these were just the first step of a more far-reaching aspiration of company modernisation and strategic renewal. Source: Authors

139 When the AMAP board was appointed there were more administrative staff than engineers and technical staff. 140 Caliman T. e Pianta G., Gennaio 2008, Analisi di Benchmarking, , from “Le imprese nel settore idrico in Italia: un analisi di benchmarking, edited by Senn L., Fondazione Amga, Gianfranco Angeli Editore, 2008, Milan, Italy. 141 According to the Authors’ knowledge this is the most recent analysis available on the subject.

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Table 4.3 AMAP PERFORMANCE AS COMPARED TO SIMILAR COMPANIES IN ITALY Water service Water Number of control Number of Personnel Average ROS142 provider losses (%) of metering per bills per year Cost/ Turnover per (%) year Total Cost employee (%) (Euro) Acqualatina 69.0 1.3 4 28.0 165,000 7.6 GORI 51.0 n.a. n.a. 37.0 120,000 8.3 Acquedotto del 49.0 2 2 29.0 140,000 1.3 Fiora AQP 49.0 2 4 29.0 205,000 6.6 AMAP 45.0 1.5 5 52.0 90,000 9.7 Publiacqua 45.0 2 4 27.5 175,000 7.9 Acque 40.0 2 3 20.0 190,500 14.8 ASA 36.0 2 4 40.0 120,000 n.a. ASM BS 33.0 2 6 n.a. 160,000 n.a. ASPEM 32.0 2 2 31.0 150.500 n.a. AcegasAps 31.0 2 6 23.0 280,000 n.a. Enia 30.0 1 2 32.0 310,000 n.a. NuoveAcque 30.0 2 4 30.0 170,000 10.4 VESTA 30.0 2 4 n.a. 135,000 n.a. SMAT 26.0 3 3 32.0 230,000 4.7 Multiservizi 25.5 2 4 50.0 130,000 n.a. HERA 23.5 n.a. n.a. 27.0 210,000 n.a. AGSM VR 22.0 2 4 34.0 290,000 n.a. AGESP 20.5 2 2 n.a. 200,000 n.a. CIIP 20.4 2 3 n.a. 115,000 -5.0 Teaacque 19.5 1 3 36.0 240,000 n.a. ACSM 19.0 3 3 n.a. 350,000 n.a. ACEA ATO2 18.2 3 4 38.0 270,000 32.3 Idrotigullio 18.0 3 3 22.0 190,500 22.4 ARIN 17.0 2 4 50.0 190,000 3.7 CAP gestione 16.0 n.a. 4 14.0 220,000 12.1 Servizi Idrici 15.0 2 3 n.a. 151,000 10.4 Novaresi MN 10.0 2 4 21.0 215,000 n.a. Mediterranea 15.1 2 4 33.0 215,000 33.0a) -14.5 delle Acque* b) -26.0 c) Source: Authors on data available in Caliman T. and Pianta G. (2008). Data on ROS refer to 2005. * The company Mediterranea delle Acque replaced Acquedotto Nicolay in 2006 and incorporated two further companies Genova Acque and Acquedotto de Ferrari Galliera; a) the value is referred to the company Acquedotto Nicolay; b) the value is referred to the company Genova Acque; c) the value is referred to the company Genova Acque.

142 ROS (Return on sales) represents the operating profit margin. It is the ratio of operating profit divided by net sales, usually presented in percent.

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The combination of political commitment and technical capacity was then supported by financial provision from the Structural Funds, which played a catalytic role in enabling project implementation. The management of the municipal operator found a prompt response to a number of constraints and limitations in the context and circumstances (see for example the problems with the original project design mentioned in the previous section), in order to speed up the administrative process and benefit from the EU funds made available at the central level. Moreover, constructive relationships were established with the Ministry of Public Work (formally the managing authority) which maintained a continuous follow up on the project, and with the other stakeholders, in particular with the Italian desk of EIB.

The EIB expert was a highly competent engineer with extensive worldwide experience at the World Bank. He made a field visit to the water network and scrutinised the pipes with instruments such as the ones used by doctors for heart monitoring. He provided quite relevant remarks and pointed to the need to have new connections to the renovated sub-networks. Source: Interview report

A significant input was in fact provided by the EIB which, despite the already existing technical designs and cost benefit analysis provided to the EU, sent an expert for a field visit. The EIB approved an additional sum for a loan to be specifically addressed to replacing the old connections with new ones.

Less influential was the role played by the Commission, which relegated itself to a mere funds provider at the time of the co-financing decision. No other input was provided either upstream at the design stage or downstream at the implementation and operation stage. At the design stage, as showed by the example of the EIB, the availability of technical expertise is a key requirement for a thorough understanding of the context (for example the implication of having only part of the entire restructuring plan financed) and to ensure an effective dialogue with the implementing body during the downstream phase of the process. A more strategic approach would have involved exercising some pressure on the municipality after the implementation of the first interventions, to ensure the additional works were completed. This would imply adopting a broader perspective, looking at the entire development plan more than on single physical interventions.

Later, in the following programming period, specific conditions could have been imposed by linking the approval of additional investment in the same area and sector to the completion of the works already financed in the past. It is therefore worth noting that continuous follow-up activities are required in order to guarantee that the ultimate development goals are fully achieved and the conditions triggering development results are fulfilled.

Project implementation progressed smoothly throughout the whole construction period (1999-2003). However, the positive conditions that enabled the project to be implemented were no longer ensured and the political, institutional and managerial context experienced a radical change. The municipal administration changed and a new management board was appointed at AMAP.

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Additional interventions were foreseen, however the ‘magic moment’ (a combination of political will, technical and financial capacity) was interrupted. This happened in 2002/2003, when the OTA was set up and some responsibilities were shifted from the municipality of Palermo to a higher level. Source: Interview report

At the same time part of the responsibilities regarding planning and investment of water infrastructure and services were shifted to the OTA, and this created a period of institutional and planning impasse.

Box 4.3 THE OTA 1 OF PALERMO The Optimal Territorial Area 1 (OTA 1) of Palermo143 comprises the association of 82 towns in Palermo province. The resident population of OTA, 1,249,577 inhabitants at 1 January 2011 (ISTAT), mostly live in Palermo (655,875 equal to 52.5% of the total), and the remaining part lives in other 81 towns (593,702 equal to 47.5% of the total), from the smallest (Sclafani Bagni with 454 residents) to the largest (Bagheria with 56,336 residents). The area of the OTA is 4,992.23 square km; the population density is 250.3 inhabitants per sq. km.

Palermo

Source: Authors

The Authority of OTA (AOTA) was appointed on 1 of July 2002; the relationship between local authorities and the AOTA is regulated by a convention144. The ambit plan was drawn up and approved on December 2002145. Subsequently, AOTA, with several acts, assigned the IWS to a private company, without any municipality participation, to be chosen through an open tender146. It was also decided to maintain continuity of the service management only in Palermo, by allowing AMAP S.p.A. to remain in charge until the termination of the contract

143 See: http://www.atoidricopalermo.it/home.asp. 144 See: http://www.atoidricopalermo.it/database/convenzione/convenzione%20di%20cooperazione%20registrata%20il%2013. 04.2007.pdf 145 See: http://www.atoidricopalermo.it/file/Piano%20dçAmbito/sintesi2.pdf. 146 Namely, with a ‘concession to a third party’, in compliance with paragraph 2 of Art. 150 of the Art. 150 del D. Lgs. 152/2006.

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between AMAP and the municipality of Palermo (2021). In 2007 the tender procedure selected Acque Potabili Siciliane S.p.A. (APS)147 and an agreement for the management148 of IWS in the ambit territory, excluding Palermo, was signed by the company.

In the following years several difficulties with the management, and struggles between AOTA and the company arose, which led to the cancellation of the service agreement by AOTA, and the company went into liquidation before completing the transfer of the operation of the infrastructures of the IWS from the municipalities. At the time the present report was drawn up, pending the decisions on how the ATO would entrust the IWS, and the outcomes of ongoing litigation between OTA and APS, APS, although in liquidation, pursues, at the request of OTA itself, the management of IWS in 51 municipalities (out of a total of 81)149. The other 30 are still managed directly by the Municipalities, and AMAP S.p.A. manages the IWS in Palermo.

Rather than clarifying the allocation of responsibilities among all the authorities involved, this institutional and legislative context created a period of impasse and uncertainty. The lack of an explicit attribution of long-term ownership of and responsibility for water infrastructures, new investment projects and the provision of the water service between the key actors (municipalities, companies and water authorities), left little room for manoeuvre for AMAP, which actually focused more on day-by-day operations than on long term strategic planning.

In this framework, a more active role by the Commission, pushing for the implementation of the remaining investments, could have been an enabling factor. External pressure may trigger a coordinated commitment to a long term development goal which might otherwise be difficult to achieve.

147 The equity of APS is shared as follows: Società Azionaria per la Condotta di Acque Potabili S.p.A. (Torino): 56.77%; Mediterranea delle Acque S.p.A. (Genova): 9.83%; Società Metropolitana Acque Torino S.p.A.: 9.83%; Giovanni Putignano & Figlio S.r.l.: 6.52%; Edil Putignano S.r.l.: 0.66%; Consorzio fra Cooperative di Produzione e Lavoro, ConsCoop, Società cooperativa: 7.64%; Studio Applicazioni Idrauliche S.r.l.: 1.09%; Desa S.r.l.: 7.67%. 148 Managing convention to regulate the relationship among the local authorities of the Optimal Territorial Ambit and the supplier of the integrated water service. 149 APS S.p.A. has 235 staff members, mostly workers and clerks.

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5 CONCLUSIONS

The water supply project in Palermo was aimed at addressing the urgent problem of water shortages and rationing affecting the citizens during the 1970s and the 1980s. For long time in Palermo water infrastructure and resources management were characterized by a lack of long- term strategic vision and inefficiencies. Although water shortages were largely related to the state of obsolescence and neglected maintenance of the distribution network leading to severe water losses, past solutions were primarily addressed at increasing total water availability. Project governance (i.e. a mix of political will and technical and managerial capacity) proved to be the enabling factor that triggered project implementation.

The interventions financed, aimed at renovating the old pipes of the distribution network in the oldest part of the city (50% of the network, corresponding to 60% of the city inhabitants), were part of a larger investment plan and supposed to be the first step in a broad reorganization of water service provision by the municipal company. Their implementation as a stand-alone project significantly improved the quality of life of the Palermo people, no longer forced to extensively and systematically make use of domestic tanks and electric pumps to facilitate water delivery during the rationing times (although this does not apply to the entire city territory and to all user types).

Key findings of the analysis are the following:

• the project produced long term effects in terms of direct welfare and economic growth as evidenced by the CBA results (ENPV of about EUR 315 million and ERR of 14.68%). The main effects benefitting the users are time savings for operating the electric pumps during the rationing times and avoided costs of purchasing, operating and maintaining the pumps. Effects on the service provider relate to a saving in operating costs.

• additional effects relate to endogenous dynamics experienced by the service provider which improved its internal capacity and know how, thanks to a new management system more focused on the actual users demand than on the water capacity of the system (‘demand driven’ management as opposed to ‘supply-driven’).

• Notwithstanding the positive results achieved, the project remains an unfinished work. At present the water supply system still suffers from heavy water losses (about 47% of supplied water), 40% of the distribution network still includes large portions of obsolete pipes and for 25% of the network the water is still rationed. Pending water speed and pressure problems would require additional significant investments.

The key determinant of the project is project governance, which proved to be the main driver for the project’s implementation and made it possible for a series of weaknesses and constraints of the project design and forecasting capacity aspects to be overcome. In the same vein however, the ‘magic moment’ that made the financing decision materialize was

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interrupted by a change in the strategy of the new board of directors of the municipal company and by an institutional impasse brought about by conflicts of responsibilities among the newly established authorities and bodies in charge of the water infrastructure and service in the Palermo province. A lack of long-term commitment to a shared development strategy meant that the positive results achieved in the short run were counterbalanced by persisting problems of severe water losses.

Interesting lessons can be learned from this case study and they are all related to the governance aspect:

• The first relates to the crucial role played by technical and managerial capacity involved in project implementation at different levels, in identifying the exact causes of the problem and suggesting the suitable project solution. High technical competence and solid managerial capacity enabled the project to be implemented on time, with no cost overruns and properly dealing with administrative, financial and institutional constraints.

• The second relates to the institutional context and legislative framework which should create a favourable context by clearly setting the share-out of responsibilities and providing incentives for committing to long term investment plans.

• The third relates to the responsibility of political will for the empowerment of high level professionals and public managers and the promotion of quality improvement in public services and, even with changes in administrations, which may express different political orientations according to the rules of democracy, in pursuing the continuity of the will to achieve the long-term goals of the running projects.

• The last is related to the role of the Commission. In order for the Commission to strengthen its role, it is advisable that it takes a more strategic view when financing major infrastructure projects. This can be done by (i) adopting a more strategic and long term view in order to ensure that the appropriate conditions under which individual interventions can deliver the expected socio-economic development results are verified in the long term; and (ii) systematically performing follow-up activities and establishing conditionalities related to the project’s broader planning context and, where relevant, to the proper provision of services of general interest (SGI). It also has a role in ensuring that the proper technical expertise is available to undertake a high level dialogue with the project beneficiaries.

This last aspect seemed to be by far the most influential for the water supply system in Palermo, and showed what in the words of one of the interviewees was the ‘primacy of politics’.

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ANNEX I. METHODOLOGY OF EVALUATION

The present Annex summarises the methodological approach undertaken for carrying out the project case studies and presented in the First Intermediate Report of this evaluation study. Moreover, the Annex further elaborates on and specifies the definition of long-term effects considered throughout the case study and the typology of determinant mechanisms analysed in interpreting the project outcomes. The main objective is to provide the reader with a set of information describing how the project evaluation was conducted and to enable him/her to replicate this methodology.150

The Annex is divided into three parts: in the first one, the overall conceptual framework of the evaluation study is recalled and the definition of long-terms effects and project determinants are laid out; in the second one, the methodology of analysis followed to implement the ex-post evaluation is discussed; finally, the structure of the case study reports and the tools used to standardise them is described in the third part.

CONCEPTUAL BASIS The Conceptual Framework of this evaluation study is based on three dimensions of analysis: the object of the evaluation (the ‘What’), the timing of the long-term effects (the ‘When) and the determinants of the project’s outcomes (the ‘How’).

The ‘What’ dimension

The Team developed a classification of long-term effects, with the aim of identifying all the possible impacts of public investments on social welfare. A broad distinction of project effects is among effects on ‘Economic development’ or ‘Quality of life’. Investment projects can foster economic development, which is generally quantifiable by aggregate indicators, such as the Gross Domestic Product; although economic development is not disconnected from the wellbeing of society, it is acknowledged that there are a number of other factors that may affect public welfare, that are not captured by the traditional economic indicators151. For the purpose of this study, the notion of quality of life152 refer to the factors that affect social development, the level of social satisfaction, the perception of social reality and other dimensions which are outside the conventional economic dimension. Under these two broad categories, a taxonomy of more specific long-term development effects of investment projects has been developed. The definition of each type of effect is provided in Table I.1.

150 Specific recommendations which may enable application of the same evaluation methodology to future projects are discussed in the Final Report of this evaluation study. 151 Dasgupta, 2011 and Stiglitz et al., 2009. 152 Used also as synonymous with wellbeing, as mentioned in the ToR.

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Table I.1 TAXONOMY OF LONG-TERM DEVELOPMENT EFFECTS Effects Definition Checklist Economic development Direct Following the traditional growth theory153, both Did the project have effects on the endowment of economic public and private investment contribute to labour or capital production factors? Did it contribute growth increasing the stock of capital and thus economic to employment creation? Did it attract new growth. The direct contribution of a project to investments? Did it create new business opportunities? economic growth, in terms not only of real growth of Did it produce time savings for business trips? Did it GDP, but also, more generally, on economic welfare produce decreases in travel costs? is discussed within this category of effect. Endogenous Endogenous dynamics comprise all the factors that Did the project contribute to the improvement of the dynamics have an indirect effect on economic growth, by productivity of the economic system? Have social improving the productivity of inputs: the increase of behaviours changed as a result of the project? Did the the stock of competences and knowledge of human project provide new/improved skills, R&D investment, capital154, the introduction of a more advanced organisational changes that translated into an increase technology155 and changes in the organisational in labour productivity? model of economic actors, making them more efficient156, are analysed insofar they contribute to increasing the production function. Quality of life Social Public investment can affect social cohesion, by Did the project promote social inclusion? Did it improve cohesion minimising disparities, avoiding social the conditions of specific segments of the population marginalisation and reducing income inequalities (e.g. elderly, migrants)? Did it improve the affordability across different socio-economic, gender or ethnic of services? groups. Environmental Polluting emissions, biodiversity loss and depletion Did the project improve the quality of the natural effects of natural resources caused by large infrastructural environment? Did it alter wildlife habitats? Did it affect projects can affect social wellbeing of both the the ecosystem? Were there any environmental issues present and future generations. related to project implementation? Territorial The project can contribute to reducing welfare Did the project improve the territorial cohesion of the cohesion disparities caused by unequal distribution of region/country? Did it play any role in urban-rural or resources and opportunities among regions and core/periphery or cross-border dynamics? Did it expand their population. The focus, in particular, is on core- the territorial coverage of the delivery of a basic periphery and urban/rural differences. service? Institutional Investment projects can bring wide spill-over effects Did the project induce any institutional learning at learning to the quality of Public Administration and other regional administrative level? Did it raise political institutions at national, regional or local level. awareness regarding a specific theme? Did it have Institutional quality is strongly related to economic effects on the level of corruption? growth157, but it can also affect the quality of life of people, because of the intrinsic value that individuals can attribute to a well-ordered society158. Social This category encompasses all those variables which Are the project beneficiaries overall satisfied with the happiness may affect the subjective perception of people’s project’s implementation and outcomes? Did the wellbeing, and have to do with their psychology, project have any effect on the perception of quality of family context, religion and cultural traits. life? Did it affect the sense of security of the target population?

In researching all the possible long-term effects of project investments, it is acknowledged that there is a risk of duplication and double-counting: for example, a project for water treatment clearly has effects on environment, which may contribute to the development of new economic activities that foster economic growth.

153 Solow, 1956. 154 Becker, 1962. 155 Griliches, 1992 and Griffith, 2000. 156 Tomer, 1982 and Martinez, 2009. 157 See, for instance, Easterly et al., 2006. 158 Sen, 1987.

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The ‘When’ dimension

The temporal dimension of analysis relates to the point in the project’s lifetime at which the effects materialise for the first time, how they develop over time and whether they have already stabilised or are still evolving. A clear distinction emerges between short-term and long-term effects, with the former being the first contributions made by the project and enjoyed by society after a relatively short time following project completion (about 1-5 years); the latter, on the other hand, become visible after a longer period of time and tend to stabilise over many years. It is acknowledged that, given the varying timeframe for different effects to appear and stabilise, the choice of the time horizon and the timeframe at which the ex-post evaluation is carried out can significantly affect the results of the evaluation.

The ‘How’ dimension

Project outcomes, i.e. the way projects affect the generation of certain effects and the varying timeframe for effects to appear and stabilise, are not certain, but result from a non- deterministic combination of different and interrelated factors. Five stylised determinants of project outcomes have been identified: appropriateness to the context, project design, forecasting capacity, project governance and managerial response. Five Working Hypotheses are related to these dimensions and explain how each of them can influence the generation of the project’s short or long-term effects (see Table I.2).

The three dimension of analysis are logically interconnected and by combining the ‘What’, ‘When’ and ‘How’ dimensions the evaluator can disentangle the causal chain between the project’s inputs and the outputs.

Methodology of analysis

The methodology developed to answer the evaluation questions consists of a combination of quantitative (Cost Benefit Analysis) and qualitative (personal interviews, surveys, searches of government and newspaper archives, etc.) techniques. Qualitative techniques are probably better at determining why certain effects are generated, along what dimensions, and underlying causes and courses of action of the delivery process. The media (including websites or blogs), in particular, have proved to be an excellent source of evidence identifying or revealing both objective information and perceptions about the project, thus concurring to assess the project’s impact on social happiness. At the same time, quantitative data can provide an important support to test and validate certain findings derived from interviews and other sources. The most important contribution of the CBA exercise is to provide a framework of analysis to identify the most crucial aspects of the projects’ ex-post performance and final outcome159.

159 More details on the approach adopted to carry out the ex-post CBA exercise and, in particular, indications on project identification, time horizon, conversion factors and other features are extensively described in the First Intermediate Report of this evaluation study.

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Table I.2 KEY DETERMINANTS OF PROJECT OUTCOMES CONSIDERED Determinant Definition Working Hypothesis Questions to be answered Appropriateness Includes the Context traits can be more or less favourable for project performance Has the (political, cultural, socio-economic, institutional, regulatory) context to the context consideration of and deserve early and careful consideration about which to take or to played a role in influencing the attainment of long-term effects? institutional, cultural, make. Were there any political, social, cultural, economic, regulatory, or institutional social and economic The terminology of context traits that can be either ‘taken’ (that is, constraints to project implementation and performance? environment into accepted, as they are considered unchangeable) or ‘made’ (by changing Was the project ‘trait taking’ or ‘trait making’ in its nature? If it was intended to which the project is existing or creating new traits) is drawn from Hirschman (1967). be trait making, did it succeed? inserted. Project design Refers to the technical The technical and engineering capacity to design an infrastructure and to To what extent and in what way did the technical, structural and financial capacity to design the provide the appropriate mechanism for its financial sustainability should features of the project influence its performance? infrastructure project be sufficiently disciplined to reduce future risks; at the same time it Did the option selection process lead to the implementation of the most and to select the best should leave some degrees of ‘latitude’ to enable adjustments for promising project idea? project option. unforeseen circumstances. Was project design capacity a relevant factor in determining the observed ex- Following Hirschman, latitude is the characteristic of a project that post performance of the project? permits the project planner and operator to mould it, or to let it ‘slip’, in Was the project design flexible enough to be adjusted, if needed, to external and one direction or another. Some projects are so structured that latitude is unexpected constraints? severely restricted or completely absent: in these cases, the project is considered highly ‘disciplined’. Forecasting Relates to the A good initial investment in building the forecasting capacity does not Were the ex-ante forecasts based on a sound methodology and a comprehensive capacity feasibility and capacity eliminate risks, but it increases the knowledge of the context, improves set of information? to predict future the project design and optimises the distribution of responsibilities Were some important factors not sufficiently considered ex-ante? variables, such as the without lowering the commitment to performance. Was the forecasting capacity a relevant factor in determining the observed ex- demand level. post performance of the project? Project Concerns the number High stakeholder involvement, well-defined roles and responsibilities and What are the interests and motives of different actors and incentives for governance and type of incentive mechanisms require commitment of resources and increase the decision-making? How did they change over the time-span considered? stakeholders involved complexity of the decision-making process, which may be subject to Was the ownership of the project clearly identified? throughout the project particular pressures, but they can favour the project performance and its Did contractual arrangements improve the co-ordination of different cycle and how sustainability over time. stakeholders towards achievement-oriented results? responsibilities are Was project visibility a relevant political incentive to foster proper project attributed and shared. implementation? Was the project subject to political or other forms of pressure? Managerial Defined as the Unpredicted events that occur and undermine the sustainability of the How did the project react to exogenous, unpredictable, events? response managerial and project and its capacity to lead to expected benefits can be overcome by What remedial actions were put in place? What mechanisms were used to professional ability to prompt and adequate response from the decision-makers and project incentivise proactive responses? react to unforeseen managers, driven either by professionalism and experience or by Why were these events unexpected? Was it due to their purely exogenous and events. creativity and imagination. ex-ante unpredictable nature? Or, was it due to poor planning capacity?

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STRUCTURE OF CASE STUDIES AND STANDARD TABLES OF RESULTS Qualitative and quantitative findings are integrated in a narrative way, in order to develop ten project ‘histories’ and to isolate and depict the main aspects behind their long-term performance. All case study reports share the same outline, presented in the following Table:

Table I.3 OUTLINE OF THE CASE STUDY REPORT SECTION CONTENT Projects The first section provides a brief sketch of the unit of analysis. It describes the key structural description features of the infrastructure and the service delivered, the context in which it takes place, the target population and the current performance of the project. Origin and history This section describes the background in which the decision to initiate the project was taken, the need and objectives expected be met and the key stakeholders involved and their role. The section should present a brief chronicle of the main developments after the construction phase and the most recent facts. Description of long- This section should describe the main long-term development effects provided by the term development project. The seven categories of effects should be considered and for each of them an effects assessment of the contribution of the project to that specific effect, and the timing of their materialisation and evolution, should be given. Determinants of The main drivers influencing the performance observed are described and elaborated here. project outcomes The evaluators should provide their own assessment for each of the five key determinants of project outcomes identified in the conceptual framework. Conclusions The key messages in terms of lessons learnt are developed here. Annexes Ex-post cost-benefit analysis report, list of interviewees, other ad hoc analysis if relevant (such as stakeholder mapping).

In order to maintain the structure of all the case study reports as similar as possible, and facilitate the cross-project analysis of findings, a set of standard tables is used to summarise the main evaluation results related to three dimensions of analysis (‘What’, ‘When’ and ‘How’). Section 3 and 4 of each case study include standardised tables in which scores are assigned to each type of long-term effect and each determinant. Scores ranging from -5 to +5 are given in order to intuitively highlight which are the most important effects generated for each case study and which are the most relevant determinants explaining the project outcomes. In other words, scores are used to rank the effects and determinants, showing which ones are the most relevant. Moreover, the plus or minus signs indicate the nature of the effects produced by the project (was the impact positive or negative?) and of the determinant of project performance (did the determinant positively or negatively contribute to the project outcome?).

The same scores are used to disentangle the project’s impacts on different stakeholders. This table allows one to better interpret the aggregated score given to each effect, by understanding on which actor the project impacted the most: for example, a +3 score to “Direct economic growth” may be reflected by a very high positive effect on the infrastructure operator (valued, for instance, +5) and a slightly negative effect on other actors (valued -2). As shown by this example, the aggregate score of each effect and the scores related to different stakeholders should be consistent with each other and should results from a sort of weighted average of the impacts on individual stakeholders: an aggregate positive score is inconsistent with negative impact scores on all the different stakeholders involved.

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Table I.4 SCORES ON PROJECT’S IMPACT AND DETERMINANTS OF PROJECT OUTCOMES Score Meaning +5 Given the existing constraints, the highest positive effects have been generated. +4 Given the existing constraints, high positive effects have been generated, but more could have been achieved under certain conditions. +3 Moderate positive effects have been generated, with large scope for further improvement. +2 Some positive effects have been produced. +1 Very little, almost negligible, positive effects have been generated. 0 No effects have been generated. -1 Very little, almost negligible, negative effects have been generated. -2 Minor negative effects have been produced. -3 Moderate negative effects have been generated, but they could have been worse. -4 Highly negative effects have been generated. -5 The highest negative effects have been generated. Note: The same scores have been used for assessing both the project’s impacts and determinants. In the first case, they have to be interpreted as the nature and strength of effect generated by the project; in the latter, they indicate the strength of each determinant factor in influencing the project outcomes.

The ‘When’ dimensions results are synthetically presented by means of another table: for each kind of effect, a score is given to explain how the nature and strength of the impact evolved over the years, by focusing in particular, on the short-run (approximately 1-5 years after the project’s completion), the long-run (6-10 years after the project’s completion) and the future period. The Table contains information that allows the reader to immediately understand whether the project impacts have already stabilised or not. The meaning of the symbols used and an example of their application is presented in the following two Tables.

Table I.5 SYMBOLS USED TO DESCRIBE THE TEMPORAL DYNAMICS OF THE EFFECTS Symbol Meaning + or - Positive or negative effect. ++ or -- Positive or negative effects reinforced (in positive or negative direction) with respect to the previous stage. +++ or --- Positive or negative effects further reinforced (in positive or negative direction) with respect to the previous stage. +/- Mixed effect, it is not possible to assess whether the impact was positive or negative.

Table I.6 EXAMPLES OF TEMPORAL DYNAMICS OF THE EFFECTS Short run Long run Future Comments (years 1-5) (years 6- 10) years + + + The positive effect stabilised in the short-run. + ++ ++ The positive effect stabilised in the long-run. + ++ +++ The effect has grown over the years and will increase also in the future. - + ++ The effect was at first negative; after some years it turned positive and it is still not stabilised yet. +/- + ++ Effects have been mixed in the initial stage, became positive in the long- run and are expected to further increase in the future.

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ANNEX II. COST-BENEFIT ANALYSIS

This Annex presents the results of the ex-post CBA of the water supply project in Palermo. The analysis was performed according to the methodology defined in the First Interim Report and, more generally, in the EC Guide (European Commission, 2008). It is not a traditional CBA, being neither an ex ante or a pure ex-post exercise. It is rather aimed at quantitatively assessing the performance of the project both in the past and in the future. To this end, historical data have been used for the past and hypotheses have been made for the future flows.

In what follows, the assumptions of the analysis and the procedure of data gathering are described in detail.

ASSUMPTIONS AND DATA GATHERING The ex-post CBA of water supply in Palermo relies on the following assumptions:

Project identification

As explained in Sections 1 and 2 of the main report, the project under analysis was part of a comprehensive plan of modernisation and reorganisation of the water distribution system in Palermo, drafted in 1990. The implemented project included eight interventions addressed to improve the distribution network, which are the reconstruction of six sub-networks, the completion of Pedemontana pipe160 and the realisation of the supervision and remote control system (see Section 2 for a more detailed description of the interventions). Actually, these interventions are the only component of the original plan which have been realised as of today. They represent the unit of analysis of the present CBA. Other investments (which were not included in the Plan) have been undertaken in parallel to the project’s realisation or after its completion. They concern both the distribution network and the adduction system. However, only the first ones have been considered in the analysis, because they are directly related to the project’s aim of improving the water distribution service in Palermo. With regard to the interventions on the adduction system, they have been treated qualitatively in the main report (see Section 2).

Although the project “Water supply in Palermo” related to only some sub-networks, the focus of the analysis has been extended to the entire distribution network, since their effects spread also to the old unrenovated sections in terms of better management and provision of the service. This means that costs and benefits have been calculated by reference to the whole distribution service, which includes the rebuilt sub-networks and the old ones, as well as the overall system of tanks for supplying water in the Palermo net. Accordingly, we excluded from the analysis all the costs not related to the distribution service. These concern on the one hand

160 This is an external bypass located in the highest part of Palermo and not interfering with the internal distribution network. It consists of a pipe connecting a chain of tanks aimed at supporting the distribution of water in the city.

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the adduction system and the purification plants, and on the other the household water systems.

Time horizon

In line with the First Interim Report, time horizon for the CBA of water supply project in Palermo is set at 30 years. Accordingly, the timeframe for the project’s evaluation runs from 1997, the first year of expenditure, to 2027. A mix of historical data from 1997 to 2011 (covering 15 years) and forecasts from 2012 to 2027 (covering 15 years) is used.

Constant prices and discount rates

Constant prices are used to perform this analysis. Accordingly, historical data (from 1997 to 2011) are reflated and converted to prices at 2011 Euro. For this purpose the yearly average percentage variation of consumer prices provided by the International Monetary Fund (IMF) is used. With regard to data from 2012 to 2027, cash flows are estimated in real terms (no inflation is considered).

Accordingly, both financial and social discount rates are used in real terms. In the financial analysis, inflows and outflows - for both the backward and forward periods of analysis - are discounted and capitalised using a rate of 5% real, as suggested in the current CBA Guide. In the economic analysis, the real backward social discount rate of 2.9% and the real forward social discount rate of 2.4%, specifically calculated for Italy (see the First Interim Report for the calculation), are used.

Without the project scenario

In compliance with the CBA guide, all cash flows have been considered incrementally, against a “Do Minimum” scenario. This latter regards the option of keeping in operation the water distribution network, as it was before the project’s realisation. It does not include investment costs but only operating costs and revenues related to the provision of the service (conservative approach, see below for further details). By contrast, the “Do Project” consists of the realisation of eight interventions, as described in Section 2 of the main report, and all the investments which were directly related to the project.

Data sources

Data have been gathered from AMAP balance sheets, opinions and information of the stakeholders and experts interviewed, as well as from a literature review on water distribution issues.

Forecasting the future

In order to assess the performance of the project in the future, some hypotheses have been made. In particular, the costs and revenues of the project are dependent on the volume of

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water withdrawn to supply drinking water in Palermo and the volume of the water billed by AMAP. The volume of water withdrawn is the amount of water fed into the distribution network and made available for consumption, while the volume billed by AMAP represents the amount of water which is consumed by the inhabitants and recorded by the measuring systems. The difference between the two represents the “total water losses”. Historical data have been provided by AMAP on the trend of these two variables from 1997 and 2010.

Hypotheses about the future have been made by taking into account the following aspects:

• Data provided by AMAP confirm that the gap between the volume of water fed into the system and that billed by AMAP has not reduced over the years. In 2010, the percentage of water fed in which gets lost is equal to 47.8% against 46.5% recorded in 1997;

• According to historical data provided by ISTAT, the population of the province of Palermo has being decreasing since 1997. This trend is confirmed also for the future. In particular, according to the forecasts161, the population is expected to decrease by 7.6% between 2011 and 2040;

• Water consumption in Palermo amounts to 191.72 l/inhabitant per day in 2010, representing an increase of 2.9% compared to 1997.

For the sake of prudence, on the basis of this picture it was decided to maintain the trend currently observed in the coming years. To this end, the following assumptions have been made about the future scenario:

• The population of Palermo municipality is assumed to reduce according to the trend forecasted by ISTAT for the entire province. This means that population in Palermo will decrease by 3.2% between 2011 and 2027.

• Per capita water consumption is expected to remain stable in the coming years, under the assumption that citizens will not change their behaviour in the use of water resources. It is assumed that from 2012 onwards it will be equal to the average water consumption per capita recorded between 2006 and 2010.

• The percentage of water losses is assumed to be constant in the coming years. In particular, it has been decided to maintain the average trend observed between 2006 and 2010 (after project implementation).

Basing on these assumptions, we estimated the future trend of the volume of water billed by AMAP and fed into the systems.

161 The reference here is to the central scenario elaborated by ISTAT. http://demo.istat.it/uniprev/download.html

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Figure II.1 VOLUME OF WATER FED AND BILLED IN PALERMO (M3) – HISTORICAL DATA (1997-2010) AND FORECASTS (2011-2027)

100,000,000

90,000,000

80,000,000

70,000,000

60,000,000

50,000,000

40,000,000 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027

volume of water fed into the system volume of water billed

Source: Authors elaboration based on AMAP data

FINANCIAL ANALYSIS

Investments Costs

The investment plan considered in the option “With Project” includes:

• Investment costs of the project;

• Other investments strictly related to the project;

• Replacement costs.

The investment components of the project considered in the financial and economic analysis are the following:

i. Civil works, including costs for labour and materials;

ii. General expenditure, including costs for project design, publicity and administrative expenditure;

iii. Equipment;

iv. Expropriations;

v. Other, including the cost of connecting users to the distribution network.

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Table II.1 INVESTMENT COSTS BY ITEMS (EUR THOUSAND, 2011 PRICES) Project year 0 1 2 3 4 5 6 7 8 9 10 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 Calendar year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Civil works 0 1,656 7,897 18,879 47,253 12,110 7,661 2,020 88 0 0 General 671 2,358 662 1,201 3,867 754 907 967 34 572 11 expenditure Expropriation 0 0 0 0 0 220 0 49 0 0 0 Equipment 0 0 0 0 58 0 0 0 0 0 0 Other 0 0 0 10 44 0 0 0 12 0 0 Total 671 4,014 8,559 20,090 51,222 13,085 8,567 3,036 134 572 11 Source: AMAP

Other investments that have to be added to the project costs are those for the provision of new meters and instrumentation and the replacement of the old connections to the network. Started in 2002, these interventions are still being implemented and resources have been allocated for their financing until 2013 (see Table II.4).

Looking at the future scenario, it is assumed that replacement investments will be needed from 2012 onwards both for the network and the supervision and remote control system. As far as the latter is concerned, it is assumed that it has a useful life of 15 years, after which it needs to be replaced. Therefore, it is assumed that AMAP will undertake the same investment in 2016 (being the supervision and remote control system completed in 2004), which amounts to EUR 1,625,691 (at 2011 prices). With regard to the network and the reservoirs, the hypothesis is that between 2012 and 2018 their replacement costs amount to 0.1% of their investment costs (EUR 108,251,212, at 2011 prices) per year, while from 2018 onwards they are increased to 0.5%. This percentage is indicated by experts as a best practice in the case of continuous maintenance interventions.

As far as the “Without project” scenario is concerned, according to a conservative approach no investment and replacement costs are foreseen.

Sources of Funds

Investment costs of the project amount to EUR 88,077,873 (EUR 109,876,903, at 2011 prices). They were covered by public funds to the tune of 80% (40% EU contribution and 40% National funds162) with the balance covered by AMAP.

The financing sources provided by AMAP derived from a loan granted by the EIB amounting to a total of EUR 36,000,000 (nominal prices). The loan was provided in five tranches between 2002 and 2008 (see Table II.2)163 and was addressed by AMAP to finance project investment costs (about EUR 17,600,000, nominal prices), the replacement of the old connections and

162 National funds used to co-finance the project are allocated as per “Comitato Interministeriale per la Programmazione Economica” (CIPE) decisions of 8.8.1995 and 12.7.1996. 163 The repayment of the loan (capital and interest) started immediately (in 2001) and it is expected to be completed in 2020.

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metering instruments (about EUR 6,620,000, nominal prices) and other interventions outside the scope of the present assessment.

Table II.2 EIB’S LOAN Date of Amount (EUR) Interest disbursement rate Tranche I 27.12.2001 10,000,000 4.82% Tranche II 23.04.2002 7,000,000 5.47% Tranche III 6.03.2003 6,000,000 4.00% Tranche IV 28.04.2005 9,000,000 Variable rate Tranche V 11.01.2008 4,100,000 5.20% Source: AMAP

Per the industrial plan drafted by AMAP for the years 2011 – 2013, additional AMAP resources (a total of about EUR 1,400,000) will be addressed to financing the provision of new metering systems and connections to the network between 2011 and 2013.

Residual Value

It is assumed that the residual value of the supervision and control system is equal to zero, because at the end of the time horizon (2027) it would be obsolete and not able to produce additional value. By contrast, the sub-networks and the main reservoirs will not have lost their value. In particular, it is assumed that after 25 years of the infrastructures’ operation the investments in civil works and equipment will present a residual value equal to 50% of their cost, while the investments in expropriation will maintain their initial value. Based on these assumptions, the residual value for the sub-networks and the reservoirs is equal to EUR 48,385,365 (2011 prices).

Operating Costs and Revenues

Since the aim of the project was to improve the water distribution service, only the cost of water delivery has to be isolated within those incurred by AMAP for the entire water service (which includes for example withdrawal, not to mention sewage and waste water services).

The operating costs include the following components:

• Labour: these are the costs of the personnel directly and indirectly related to the water distribution service. The number of employees in 1997 and 2010 has been provided by AMAP164. The personnel costs in 1997 and 2010 have been calculated using the labour unit cost related to the water service as per the AMAP balance sheet. The historical flow has then been accumulated on the basis of these two values.

164 In 1997, 181 employees dealt with the water distribution service out a total of 388 employed in the provision of water service, while in 2010, this number had decreased to 125 (out a total of 242).

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• Other costs (including raw material, service and rentals): according to the information provided by AMAP, in 1997 the other costs related to the water distribution service represented about 2.57% of the total other costs covered by AMAP for the provision of the integrated water service165. In 2010, this share amounted to 2% of the total other costs, in line also with the reduction in employees between 1997 and 2010. On the basis of these two values, the historical flow of the other costs has been estimated.

The identification of the operating costs for the “Do minimum” and “With Project” options relied on the following assumptions:

“Do Minimum”: an increase in operating and maintenance costs would have occurred to keep in operation the old networks without lowering the service quality level. However, given the lack of reliable information on how the operating costs would have increased without the project realisation, in order to avoid an arbitrary hypothesis on the increase of costs, we assumed cautiously that these remain constant and equal to the average costs incurred between 1997 and 1999.

“With Project”: Data provided by AMAP in 1997 and 2010 have been used to estimate the historical trend. As for the future, it is assumed that the number of employees will be stable from 2011 onwards and that both the personnel costs and other costs change proportionally to the water volume fed into the distribution network.

Similarly to the operating costs only the revenues related to the water distribution service have been considered for the purpose of the analysis166. More specifically, considering that AMAP is in charge of providing the service also to the neighbouring municipalities, only the revenues deriving from the water supplied in Palermo Municipality have been taken into account. Historical data from 1997 to 2010 have been gathered from AMAP balance sheets, while forecasts have been made for the future in relation to the volume of water billed by AMAP. Revenues are the same both in the “Do Minimum” and “With Project” Options, as it is assumed that they are not affected by project implementation.

Project’s Financial Performance

Results of the incremental scenario calculated as the difference between the two options “With Project” and “Do Minimum” are presented in Table II.4. It is worth noting that a direct effect of the project is observed on AMAP itself, in terms of reduction of labour costs. These decrease over the years as a consequence of the improved condition of the network, which requires less maintenance and monitoring. The overall saving amounts to EUR 20,418,234 (discounted value).

On a financial basis, the profitability of the project is negative. The Net Present Value (NPV) on investment is equal to - EUR 147,951,095 (at a discount rate of 5% real), with an internal rate of return of -1.90%. These negative values confirm that the project was in need of EU funding

165 The IWS includes drinking water, sewage and wastewater treatment service provision. 166 Thus excluding those derived from the sewage and the waste water treatment services provided by AMAP.

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since no private investor would have been motivated to implement it without an appropriate financial incentive.

Notwithstanding this financial performance, AMAP has been able to ensure the financial sustainability of its operations over the years and in particular of those related to the water service provision. The net operating income and the EBIT margin (Earnings before Interest and Taxes)167, as per the income statement for water service provision and for the entire activity of AMAP (the provision of the integrated water service), show that apart from a negative performance recorded between 2000 and 2003, the profitability of AMAP has always been positive.

Figure II.2 PROFITABILITY OF AMAP (EUR)

15,000,000 15,000,000

10,000,000 10,000,000

5,000,000 5,000,000

0 0

-5,000,000 -5,000,000

-10,000,000 -10,000,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Operating Income (only water service) EBIT Margin (only water service) Operating Income (integrated water service) EBIT Margin (integrated water service)

Source: Authors

ECONOMIC ANALYSIS

From market to accounting prices

In order to take into account the social opportunity cost of the inputs of the project, the market prices have been converted into accounting prices. To this end we use the conversion factors suggested by the Italian Guide for the Public Investments (NUVV, 2001), and the standard conversion factor168 specifically calculated for Italy (see Table below). The only exceptions are represented by some cost items, for which a specific conversion factor has been calculated as a combination of other primary items, on the basis of engineering judgement and experience on similar works. As an example, the civil works, as considered in the financial analysis, is composed of labour costs (18%), equipment costs (30%) and raw material costs (52%). The conversion factor for civil works has been calculated as the sum of each component multiplied by its conversion factor. The Table below summarises the conversion factors applied for each item.

167 The operating income is the difference between operating revenues and operating expenses. The EBIT measures the profit by excluding interest and income tax expenses. EBIT is given by: Revenue - Operating expenses + Non-operating income. This latter represents gains or losses from sources not related to the typical activities of the organization. 168 See the First Interim Report for details on how this conversion factor was estimated.

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Table II.3 CONVERSION FACTORS USED IN THE ECONOMIC ANALYSIS Item Source Conversion factor Investment costs Civil works Own calculation 0.826 General expenditure SCF 0.997 Expropriation NUVV Guide 0.648 Equipment NUVV Guide 0.885 Extraordinary maintenance Own calculation 0.826 Other SCF 0.997 Residual value Own calculation 0.825 Operating costs Labour NUVV Guide 0.770169 Other costs Own calculation 0.941 Source: Authors

Project’s Effects

Evidence from the literature shows that empirical methods have been mostly devoted to valuing benefits derived from an improved water service. These include either price elasticity (Zachariadis, T., 2010) or contingent evaluation techniques (Casey et al., 2006; Soto Montes de Oca et al., 2005). The latter represents the methodology mostly used and consists of a survey directly addressed to asking individuals what they would be willing to pay (WTP) for a given change in water service level or water attribute. In contrast to WTP, people can be also asked what they would be willing to accept (WTA) in terms of compensation for loss of service or in terms of service for a given price.

As reported by Alcubilla (2002), these empirical studies typically ignore much of the interaction between long-term and short-term conservation measures and look only at a single shortage event, defined by a given level of shortage with a certain frequency. It would be necessary to estimate the value of an entire probability distribution of shortages. Several studies (Griffin and Mjelde 2000, CUWA 1994) have shown that consumers have difficulty interpreting probabilistic information, which leads to inconsistent results170. Griffin and Mjelde add that even in the absence of probabilistically defined contingent valuation scenarios, there are two pitfalls which raises the burden for survey instruments. These are the "birthright" perspective and consumers' lack of personal consumption information. With respect to the first, water is popularly thought of as a public good to which people have some inalienable entitlement. Many see water bills as a tax rather than an invoice for the on-demand delivery of treated water. Consequently, there is a strong tendency for respondents to protest against proposed

169 A specific conversion factor has been calculated by Del Bo et. alal. (2011) for Sicily and this is equal to 0.34. However, given that the personnel employed by AMAP are mainly skilled workers and engineers, the authors decided to use the conversion factor suggested at national level (0.77), which is considered more appropriate to estimate the opportunity cost of qualified labour. Since no significant changes in the labour market are expected in future the same conversion factor is used both in the past and future periods. 170 “When contingent valuation methods are employed to assess consumer losses due to shortfall, the contingent valuation analysis can address either the value of avoiding a current shortfall or the value of changing the character of probabilistically

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WTP scenarios. With respect to the second pitfall, most households are not aware of their actual water use or their water bills. Not only is water a low budget share item for most households, thus failing to motivate much attention, but water bills are sometimes lumped into utility bills that may include electricity, natural gas, and waste collection components.

An alternative approach to stated preferences methods has been developed by Lund (1995). Assuming that consumers exhibit cost-minimizing behaviour, Lund uses a mathematical programming approach to analyze the costs of alternative short – and long –term conservation measures that consumers could implement to avoid the impacts of water shortages. He considers different level of shortages and derives for each of them the WTP of individual households or groups of households on the basis of their demand for water171.

For the purpose of the present analysis, it was decided to test two alternative methodologies for quantifying benefits related to an improved service provision. The first one takes into account the avoided costs for the users of self-provision of water during the rationing periods and the more efficient operation and maintenance of household appliances and water supply equipment deriving from an increased reliability of water supply. The second one concerns the calculation of the WTP by assuming that this value is related to the number of complaints for water service provision. In what follows, the two approaches are described in detail. a) Avoided costs in self provision of water and more efficient usage of appliances and house water systems

Before the project implementation water in Palermo was rationed thus implying that inhabitants were forced to equip themselves with domestic tanks for collecting water and electric devices for pumping it into the house water systems with an adequate pressure. Evidence from interviews confirm that after project implementation, in most but not all cases, this equipment is no longer needed, especially where water is supplied 24 hours per day and at a high pressure (this is the case for buildings). The social benefit deriving from the improved service delivery has been monetised in terms of avoided costs of maintaining and operating the electric pumps. These include the investment costs for purchasing the pump (renewal), the costs of the electric power needed for its functioning, the maintenance costs and time spent by users (this includes time to collect information about hours and days of water rationing as well as the time spent to fill in the tanks and turning on/off the pumps).

Adopting the AMAP classification, users are distinguished into: i) domestic users equipped with a water meter smaller than 25 mm diameter, identifiable as “households”, accounting for 98,669 units in 2006172; ii) domestic users equipped with a water meter larger than 25 mm diameter, identifiable in high apartment blocks, accounting for 5,510 units; iii) non-domestic users, such as commercial, craft and industrial users, hospitals, schools, etc., accounting for 11,809 units. Only a share of these users have ceased the use of the tanks and electric devices,

defined future shortfalls. The probabilistic information necessary for future shortfall surveys confounds respondents and reduces data quantity and quality” (Griffin and Mjelde, 2000). 171 See also Brozovìc N. at all, 2007. 172 Estimations have been made according to the growth of population both for the past and the future.

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because as stated above this occurred only where the service is provided 24 hours per day and water is pumped with an adequate pressure. Currently, some sub-networks belonging to the un-renovated part of the network still operate with rationing. As far as the renovated sections are concerned, the provision of the service is continuous but water pressure is still low in some cases for high buildings. For these reasons, we assumed that out a total of 72,817 users supplied by the renovated sub-networks, 85% of households, 25% of apartment blocks and 70% of non-domestic users do not make use of electric devices. With regard to the 43,171 users supplied by the un-renovated sub-networks, we assumed that the share amounts to 25% of households, 7.5% of apartment blocks and 15% of non-domestic users.

As a result, out a total of 115,988 users supplied by the entire distribution network, 60% of households, 15% of apartment block and 55% of non-domestic users are no longer forced to self-provide water.

According to the typology of users, specific assumptions have been made for each of the following cost components:

• Purchase of the electric pump: this is assumed to cost EUR 185 per household, EUR 511 for each apartment block and EUR 329 for a non-domestic user. Given a life cycle of the pump of 8 years, the annual benefit is estimated at EUR 23, EUR 63 and EUR 41 for the three categories, respectively.

Hypothesis Household Apartment Block Non-Domestic User Elevation Head and flow load 5 meter 9 meter 9 meter Ground elevation 17.5 meter 28 meter 1 meter Typology of Pump173 2HM5 CAM 120/35 4HM5 Cost 185.9 Euro 511.5 Euro 329.5 Euro Lifetime 8 years 8 years 8 years Annual average cost 23.24 Euro 63.94 Euro 41.19 Euro Note: In order to calculate the costs supported by the households we are assuming a house with four levels plus ground floor; for the apartment block we are hypothesizing seven levels plus ground floor. Source: Authors based on experts’ opinion.

• Maintenance of the electric pump: on the basis of expert opinion, this is assumed to be equal to 5% of the total cost of the pump per annum. Accordingly, it amounts to 9.3 Euro/year for household, 25.6 Euro/year per apartment block and 16.5 Euro/year per non-domestic user.

• Power: this is assumed to be 3.3 Euro/year per household, 126.7 EUR/year per apartment block and 4.6 Euro/year per non-domestic user.

173 http://www.oppo.it/materiali/pompe/e_pompe_autoclave.htm.

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Hypothesis Household Apartment Block Non-Domestic User Average performance of 0.7 0.8 0.8 the pump Ground elevation 22.5 meter 37.0 meter 10.0 meter Yearly volume to raise 157 m3 4,189 m3 755 m3 Power needed 13.8 KWh/year 528.0 KWh/year 25.7 KWh/year Annual Cost 3.3 Euro 126.7 Euro 4.6 Euro Source: Authors based on experts’ opinion

• Time saving: this benefit relates to the time saved by the users for the self-provision of water during the rationing periods. It is assumed that households and non-domestic users have saved up to 52 hours per year, while the apartment block up to 48 hours per year. It is worth noting that in the case of the households, the number of apartment units per household has been considered (which amounts to 117,779, implying 1.2 units per household). The rationale for this relies on the assumption that where two families live in the same household, they are both affected by the benefit, because they both invest time in the activities related to filling and operating the tank (collecting information about rationing times and manually operating the pumps). In order to estimate the value of time, we considered the regional GDP per capita provided by Eurostat. As for non-domestic users, we calculated the average income per hour, while for domestic users we considered the unit value for the time they are active (see Table below for the calculation).

Regional GDP per capita) Days Hours Unit value for hour (in Euro, 2008 prices) (in Euro, 2008 prices) Domestic Users 16,800 365 18b) 2.56 Non-domestic Users 16,800 220c) 8d) 9.55 Note: a) Eurostat data (2008); b) hours per day in which a person is active; c) Working days per year; d) working hours per day. Source: Authors calculation.

For the sake of completeness, a further benefit is taken into account. This relates to the more efficient usage and maintenance of household appliances (e.g. washing machines, dishwashers, etc.) and the household water supply equipment thanks to a more reliable, non- intermittent, uniform pressure, water supply. To quantify this benefit, we considered the number of apartment units per households and per apartment blocks (respectively amounting to 117,779 and 151,668 units in 2006) and the number of non-domestic users (11,634 in 2006). As stated above, we assumed that only a share of these users are interested in the benefit, specifically 60% of the apartment units in the households, 15% of those in the apartment block and 55% of non-domestic users.

To estimate the benefit, we assumed the cost of a common maintenance intervention for each of the three categories. Furthermore, we assumed that if the project had not been realised, users would have been forced to carry out this intervention at least one time over a period of thirty years.

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Cost for a maintenance intervention Time Yearly Average of appliances (in Euro) horizon cost (in Euro) apartment units in households 50 30 years 1.7 apartment units in apartment 50 30 years 1.7 blocks non-domestic Users 250 30 years 8.3 Source: Authors calculation

To sum up, three kinds of benefits have been considered: Service costs avoided, including avoided costs for the purchase of the pump, for the electric power and for the maintenance of the pump, time saving in self-provision of water and avoided costs of maintaining appliances and household water supply systems. The total discounted value of these benefits is reported in the Table below.

Total value % of the total benefit (in Euro, discounted) Service costs avoided 66,902,889 16.4 Time saving 335,698,570 82.3 General maintenance avoided costs 5,204,499 1.3 Overall Benefit 407,805,958 100 Source: Authors b) WTP proxied with the reduction of complaints and related avoided costs

An alternative methodology was tested to calculate the effects deriving from a more reliable service provision. To this purpose a model of the willingness to pay by users on the basis of the number of complaints regarding water service provision was developed. In the water service field, the number of complaints is recognised to be a reliable indicator of the level of service quality, and is used worldwide both by academics and in the industry by best practice suppliers174. Bearing in mind this established practice, to estimate the benefit we assumed the demand curve for an improved service to be equal to the demand curve for a reduction in complaints.

The assumption underlying the methodology is that the higher the number of complaints, the more users are willing to pay for an improved service. More specifically, experience points to a function of the elasticity of demand for a better service versus price that is inversely proportional to the number of the complaints per year.

(dr / r) /(dW /W ) = η / r [1]

174 A representative example is given by the performance indicators developed by the Efficient Operation and Management of Urban Water System Specialist Group of the International Water Association (IWA, http://www.iwahq.org/1nb/home.html) (H. Alegre et al., 2006). See in particular the following indicators of service quality: QS26, complaints about the service, for connection (number of complaints /1000 nodes / year); QS27, complaints about the service, client (number of complaints / customers / year); QS28, complaints about pressure (%); QS29, complaints about service continuity (%); QS30, complaints about water quality (%); QS31, complaints about service interruptions; QS32, complaints and inquiries about bills; QS33, other complaints and requests; QS34, answers to written complaints.

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where:

W (€) = price paid by the users for the reduction of complaints (i.e. the WTP for the same effect), r (y-1) = total number of complaints in the Palermo network in a year,

= coefficient of elasticity.

The following function of the WTP on the complaints is obtained by integrating [1]:

ar W = Ke [2] where we set a = 1 / η.

Function [2] is completely defined by two parameters (K, a = 1 / η), which can be determined through knowledge of two points of the curve175.

The model has been calibrated on the data of complaints for the years 2002 – 2010 provided by the customer service department of AMAP and already shown in Figure 3.2. The first point of the curve is fixed by estimating the WTP of users under the hypothesis of an old and degraded network and, thus, a service provision of low quality for which a high number of complaints is recorded. In the case of Palermo, this point is calculated by considering the number of complaints (29,868) in 2002 in the network, which corresponds to a price that the citizens of Palermo are willing to pay for a better service, which is evidently equal to or greater than the total avoided costs as described in the previous paragraph for the year 2010 (amounting to EUR 29,038,139). The other point on the WTP curve is obtained by modelling a future situation with a regime of steady water service, obtained by the completion of the interventions in the entire network. As a consequence, the service can be expected to improve and the number of complaints to reduce, but even in this situation a number of complaints and a residual WTP by various groups of users, who, for various reasons, suffer an unsatisfactory service, will remain.

For the purpose of the calculation, the number of complaints in 2010 in the six new subnets (amounting to 1,606) has been extrapolated to the entire network, considering also a further improvement (by a factor of 1.5) due to better service management that will result from a completely upgraded network. The residual WTP in this situation was reduced in proportion to the number of complaints. The result of these assumptions is the demand curve for an improved service as shown in the figure below.

175 Note that the point (0, 0) does not belong to the curve for any K ≠ 0.

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Figure II.3 DEMAND CURVE FOR AN IMPROVED SERVICE PROVISION

Source: Authors

The benefit of the reduction in the observed number of complaints is obtained by integrating the WTP demand curve between the situation without the project and the situation with the project implemented (number of complaints in 2002 and 2010, respectively, see Figure AIII.3).

f f ar Bif = − dW = − Kae dr ∫i ∫i [3]

Solving the integral above the following expression of the overall project benefit is obtained:

ari arf Bif = K(e − e ) [4]

As a result, the total benefit deriving from an improved service amounts to EUR 26,188,656 (non discounted value).

In terms of discounted values and constant prices (2011), the overall benefit of the improved service calculated by the model shown here is 66% higher than the value calculated using the previous method.

For the purpose of the economic assessment of the project, we considered the benefits as described under a) above, to be conservative.

Economic performance

From a socioeconomic point of view, the performance of the project is positive. The Economic Net Present Value (ENPV) and Economic Rate of Return (ERR) amount to EUR 315,174,161 and 14.68%, respectively (see Table II.5 for an overview of the economic analysis)176.

176 If considering the WTP for the assessment of benefits, the ENPV is equal to 582,723,862 Euro and the ERR is 17.68%.

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These results differ from the ex-ante expectations. The CBA carried out ex-ante show a higher economic rate of return, namely 31.50%. The main reason for this mismatch lies with the adoption of a different methodological approach, such as the estimation of the benefits177 and the hypothesis on operating costs. Although not comparable because of methodological inconsistency, this difference may also broadly reflect the overestimation of the expected benefits ex-ante178 as compared to what achieved ex-post.

177 For example the costs related to the maintaining and operating of the pumps have been considered as a negative externality in the ex ante CBA, in terms of a loss of revenues for the related economy. 178 The total value of benefits estimated ex-ante amounts to 83,551 million Lire (EUR 43.15 million). These benefits were calculated through a WTP derived from the demand for drinking water in Palermo.

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Table II.4 FINANCIAL ANALYSIS (EURO, 2011 PRICES) Years n. -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 Calendar Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 COSTS Invest. Costs Civil works 0 1,655,887 7,897,400 18,879,429 47,253,167 12,109,919 7,660,682 2,019,915 88,411 0 0 General 671,148 2,357,759 661,519 1,200,828 3,867,394 754,472 906,767 967,219 33,560 572,219 10,773 expenditure Expropriation 0 0 0 0 0 220,434 0 48,703 0 0 0 Equipment 0 0 0 0 57,553 0 0 0 0 0 0 Other 0 0 0 10,124 43,552 0 0 0 12,217 0 0 New meters and 0 0 0 0 0 6,583,549 0 0 1,002,285 0 360,174 instrumentation Replacement 0 0 0 0 0 0 0 0 0 0 0 costs Residual value 0 0 0 0 0 0 0 0 0 0 0 Total Invest. Costs 671,148 4,013,646 8,558,919 20,090,381 51,221,666 19,668,374 8,567,450 3,035,838 1,136,473 572,219 370,947 Operating costs Other costs 0 0 0 44,302 66,886 89,865 112,834 135,733 159,592 183,966 208,764 Labour 0 0 0 -519,138 -752,523 -972,463 -1,175,078 -1,360,583 -1,539,779 -1,708,239 -1,865,396 Total Operating 0 0 0 -474,836 -685,637 -882,598 -1,062,244 -1,224,849 -1,380,187 -1,524,274 -1,656,632 Costs TOTAL COSTS 671,148 4,013,646 8,558,919 19,615,545 50,536,029 18,785,776 7,505,206 1,810,988 -243,713 -952,055 -1,285,685 REVENUES AMAP revenues 0 0 0 0 0 0 0 0 0 0 0 Total Revenues 0 0 0 0 0 0 0 0 0 0 0 Net Cash flow -671,148 -4,013,646 -8,558,919 -19,615,545 -50,536,029 -18,785,776 -7,505,206 -1,810,988 243,713 952,055 1,285,685 Discounted Cash -1,395,268 -7,946,744 -16,139,118 -35,226,700 -86,433,760 -30,600,050 -11,643,038 -2,675,654 342,929 1,275,844 1,640,896 flow

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Years n. -4 -3 -2 -1 0 1 2 3 4 5 6 Calendar Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 COSTS Invest. Costs Civil works 0 0 0 0 0 0 0 0 0 0 0 General 0 0 0 0 0 0 0 0 0 0 0 expenditure Expropriation 0 0 0 0 0 0 0 0 0 0 0 Equipment 0 0 0 0 0 0 0 0 0 0 0 Other 0 0 0 0 0 0 0 0 0 0 0 New meters and 0 760,947 336,425 902,000 350,000 150,000 0 0 0 0 0 instrumentation Replacement 0 0 0 0 108,251 108,251 108,251 108,251 1,733,942 108,251 541,256 costs Residual value 0 0 0 0 0 0 0 0 0 0 0 Total Invest. Costs 0 760,947 336,425 902,000 458,251 258,251 108,251 108,251 1,733,942 108,251 541,256 Operating costs Other costs 234,440 257,016 287,091 304,230 304,142 303,931 303,618 303,229 302,660 302,093 301,526 Labour -2,015,464 -2,125,445 -2,283,326 -1,843,033 -1,842,502 -1,841,223 -1,839,327 -1,836,969 -1,833,524 -1,830,086 -1,826,654 Total Operating -1,781,025 -1,868,429 -1,996,235 -1,538,803 -1,538,360 -1,537,292 -1,535,709 -1,533,740 -1,530,864 -1,527,993 -1,525,128 Costs TOTAL COSTS -1,781,025 -1,107,481 -1,659,810 -636,803 -1,080,109 -1,279,041 -1,427,458 -1,425,489 203,078 -1,419,742 -983,872 REVENUES AMAP revenues 0 0 0 0 0 0 0 0 0 0 0 Total Revenues 0 0 0 0 0 0 0 0 0 0 0 Net Cash flow 1,781,025 1,107,481 1,659,810 636,803 1,080,109 1,279,041 1,427,458 1,425,489 -203,078 1,419,742 983,872 Discounted 2,164,847 1,282,048 1,829,940 668,643 1,080,109 1,218,134 1,294,746 1,231,391 -167,073 1,112,405 734,180 Cash flow

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Years n. 7 8 9 10 11 12 13 14 15 Calendar Year 2019 2020 2021 2022 2023 2024 2025 2026 2027 COSTS Invest. Costs Civil works 0 0 0 0 0 0 0 0 0 General expenditure 0 0 0 0 0 0 0 0 0 Expropriation 0 0 0 0 0 0 0 0 0 Equipment 0 0 0 0 0 0 0 0 0 Other 0 0 0 0 0 0 0 0 0 New meters and 0 0 0 0 0 0 0 0 0 instrumentation Replacement costs 541,256 541,256 541,256 541,256 541,256 541,256 541,256 541,256 541,256 Residual value 0 0 0 0 0 0 0 0 -48,385,365 Total Invest. Costs 541,256 541,256 541,256 541,256 541,256 541,256 541,256 541,256 -47,844,109 Operating costs Other costs 300,961 300,198 299,436 298,677 297,920 297,164 296,250 295,339 294,430 Labour -1,823,229 -1,818,606 -1,813,994 -1,809,395 -1,804,807 -1,800,231 -1,794,692 -1,789,170 -1,783,665 Total Operating Costs -1,522,268 -1,518,408 -1,514,558 -1,510,718 -1,506,887 -1,503,066 -1,498,441 -1,493,831 -1,489,235 TOTAL COSTS -981,012 -977,152 -973,302 -969,462 -965,631 -961,810 -957,185 -952,575 -49,333,344 REVENUES AMAP revenues 0 0 0 0 0 0 0 0 0 Total Revenues 0 0 0 0 0 0 0 0 0 Net Cash flow 981,012 977,152 973,302 969,462 965,631 961,810 957,185 952,575 49,333,344 Discounted Cash 697,187 661,375 627,399 595,165 564,584 535,572 507,616 481,115 23,730,182 flow

Financial discount rate (backward) 5% FNPV -147,951,095 FRR -1.90%

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Table II.5 ECONOMIC ANALYSIS (EURO, 2011 PRICES) Years n. -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 Calendar Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 COSTS Invest. Costs CF Civil works 0.826 0 1,367,905 6,523,934 15,596,037 39,035,193 10,003,838 6,328,385 1,668,624 73,035 0 0 General 0.997 669,134 2,350,686 659,534 1,197,225 3,855,792 752,208 904,047 964,317 33,459 570,502 10,740 expenditure Expropriation 0.648 0 0 0 0 0 142,841 0 31,560 0 0 0 Equipment 0.885 0 0 0 0 50,935 0 0 0 0 0 0 Other 0.997 0 0 0 10,093 43,422 0 0 0 12,180 0 0 New meters and 0.885 0 0 0 0 0 5,826,441 0 0 887,022 0 318,754 instrumentation Replacement 0.826 0 0 0 0 0 0 0 0 0 0 0 costs Residual value 0.825 0 0 0 0 0 0 0 0 0 0 0 Total Invest. 669,134 3,718,591 7,183,468 16,803,356 42,985,341 16,725,329 7,232,432 2,664,501 1,005,697 570,502 329,494 Costs Operating costs Other costs 0.941 0 0 0 41,688 62,940 84,563 106,177 127,725 150,176 173,112 196,447 Labour 0.770 0 0 0 -399,736 -579,443 -748,796 -904,810 -1,047,649 -1,185,630 -1,315,344 -1,436,355 Total Operating 0 0 0 -358,048 -516,503 -664,233 -798,633 -919,924 -1,035,453 -1,142,233 -1,239,908 Costs TOTAL COSTS 669,134 3,718,591 7,183,468 16,445,308 42,468,838 16,061,095 6,433,799 1,744,578 -29,756 -571,730 -910,414 BENEFITS service costs 0 0 0 0 0 0 1,963,152 2,692,505 3,076,931 2,990,649 2,907,169 avoided time saving 0 0 0 0 0 0 9,850,505 13,510,178 15,439,116 15,006,177 14,587,302 maintenance 0 0 0 0 0 0 152,717 209,455 239,360 232,648 226,154 costs avoided TOTAL BENEFITS 0 0 0 0 0 0 11,966,374 16,412,137 18,755,407 18,229,474 17,720,626 Net Cash flow -669,134 -3,718,591 -7,183,468 -16,445,308 -42,468,838 -16,061,095 5,532,576 14,667,559 18,785,163 18,801,205 18,631,039 Discounted -1,027,410 -5,875,224 -11,029,728 -24,539,023 -61,584,335 -22,633,914 7,576,986 19,521,429 24,297,039 23,632,446 22,758,556 Cash flow Years n. -4 -3 -2 -1 0 1 2 3 4 5 6

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Calendar Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 COSTS Invest. Costs CF Civil works 0.826 0 0 0 1,367,905 6,523,934 15,596,037 39,035,193 10,003,838 6,328,385 1,668,624 73,035 General 0.997 0 0 0 2,350,686 659,534 1,197,225 3,855,792 752,208 904,047 964,317 33,459 expenditure Expropriation 0.648 0 0 0 0 0 0 0 142,841 0 31,560 0 Equipment 0.885 0 0 0 0 0 0 50,935 0 0 0 0 Other 0.997 0 0 0 0 0 10,093 43,422 0 0 0 12,180 New meters and 0.885 0 673,438 297,736 0 0 0 0 5,826,441 0 0 887,022 instrumentation Replacement 0.826 0 0 0 0 0 0 0 0 0 0 0 costs Residual value 0.825 0 0 0 0 0 0 0 0 0 0 0 Total Invest. 0 673,438 297,736 798,270 399,175 222,175 89,425 89,425 1,432,386 89,425 447,124 Costs Operating costs Other costs 0.941 220,608 241,852 270,153 286,280 286,198 285,999 285,705 285,338 284,803 284,269 283,736 Labour costs 0.770 -1,551,908 -1,636,592 -1,758,161 -1,419,135 -1,418,727 -1,417,742 -1,416,282 -1,414,466 -1,411,814 -1,409,166 -1,406,524 Total Operating -1,331,300 -1,394,740 -1,488,008 -1,132,855 -1,132,529 -1,131,742 -1,130,577 -1,129,128 -1,127,010 -1,124,897 -1,122,788 Costs TOTAL COSTS -1,331,300 -721,302 -1,190,272 -334,585 -733,354 -909,568 -1,041,152 -1,039,703 305,375 -1,035,472 -675,663 BENEFITS service costs 2,834,662 2,723,358 2,688,971 2,644,779 2,644,018 2,642,181 2,639,461 2,636,077 2,631,134 2,626,200 2,621,275 avoided time saving 14,223,479 13,664,990 13,492,447 13,270,703 13,266,886 13,257,671 13,244,021 13,227,043 13,202,239 13,177,482 13,152,771 maintenance 220,514 211,855 209,180 205,742 205,683 205,540 205,329 205,065 204,681 204,297 203,914 costs avoided TOTAL BENEFITS 17,278,654 16,600,203 16,390,598 16,121,224 16,116,586 16,105,393 16,088,810 16,068,185 16,038,054 16,007,979 15,977,960 Net Cash flow 18,609,954 17,321,505 17,580,870 16,455,809 16,849,940 17,014,960 17,129,962 17,107,888 15,732,678 17,043,451 16,653,623 Discounted 22,092,128 19,983,083 19,710,691 17,929,384 17,841,408 17,508,394 17,129,962 16,706,922 15,003,851 15,872,951 15,146,382 Cash flow

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Years n. 7 8 9 10 11 12 13 14 15 Calendar Year 2019 2020 2021 2022 2023 2024 2025 2026 2027 COSTS Invest. Costs CF Civil works 0.826 0 0 0 0 0 0 0 0 0 General expenditure 0.997 0 0 0 0 0 0 0 0 0 Expropriation 0.648 0 0 0 0 0 0 0 0 0 Equipment 0.885 0 0 0 0 0 0 0 0 0 Other 0.997 0 0 0 0 0 0 0 0 0 New meters and 0.885 0 0 0 0 0 0 0 0 0 instrumentation Replacement costs 0.826 447,124 447,124 447,124 447,124 447,124 447,124 447,124 447,124 447,124 Residual value 0.825 0 0 0 0 0 0 0 0 -39,920,956 Total Invest. Costs 447,124 447,124 447,124 447,124 447,124 447,124 447,124 447,124 -39,473,832 Operating costs Other costs 0.941 283,204 282,486 281,770 281,055 280,343 279,632 278,771 277,914 277,058 Labour costs 0.770 -1,403,886 -1,400,326 -1,396,776 -1,393,234 -1,389,701 -1,386,178 -1,381,912 -1,377,661 -1,373,422 Total Operating Costs -1,120,682 -1,117,841 -1,115,006 -1,112,179 -1,109,359 -1,106,546 -1,103,141 -1,099,747 -1,096,363 TOTAL COSTS -673,558 -670,716 -667,882 -665,055 -662,235 -659,422 -656,017 -652,623 -40,570,195 BENEFITS service costs avoided 2,616,360 2,609,726 2,603,108 2,596,508 2,589,924 2,583,357 2,575,408 2,567,484 2,559,585 time saving 13,128,106 13,094,818 13,061,615 13,028,495 12,995,460 12,962,508 12,922,625 12,882,864 12,843,226 maintenance costs 203,531 203,015 202,501 201,987 201,475 200,964 200,346 199,729 199,115 avoided TOTAL BENEFITS 15,947,998 15,907,559 15,867,224 15,826,990 15,786,859 15,746,829 15,698,379 15,650,078 15,601,925 Net Cash flow 16,621,556 16,578,276 16,535,106 16,492,045 16,449,093 16,406,251 16,354,396 16,302,700 56,172,121 Discounted Cash 14,762,907 14,379,362 14,005,779 13,641,900 13,287,472 12,942,250 12,598,968 12,264,789 41,268,756 flow Economic discount rate (backward) 2.9% Economic discount rate (forward) 2.4% ENPV 315,174,161 Euro ERR 14.68%

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Synthesis of the hypotheses of analysis and sources

The following Table lists the different sources consulted to derive the financial and economic flows and the hypotheses and assumptions made by the Team in carrying out the CBA.

Table II.6 SYNTHESIS OF SOURCES AND HYPOTHESIS MADE FOR THE CBA Item Source Hypothesis Population ISTAT Historical data on the population trend in Palermo Municipality have been gathered from the National Statistical Institute (ISTAT). For the future, the growth has been derived from the forecasts made by ISTAT for the entire province of Palermo (central scenario). Water losses AMAP AMAP provided data on the volume of water fed and billed between 1997 and 2010. The difference represents the volume of water lost. For the future, it is assumed that the water losses remain constant and equal to the average value recorded between 2006 and 2010. Water consumption AMAP/ISTAT It is derived from the ratio between the historical data on volume of water billed (provided by AMAP) and population (ISTAT). For the future, it is assumed to be constant and equal to the average value recorded between 2006 and 2010. Volume of water fed and AMAP From 2011 onwards, water billed is calculated as the population billed multiplied for the volume of water consumed per capita; Water fed into the system is estimated as the volume of water lost plus the volume of water billed. Investment costs AMAP AMAP provided details for each investment component. Replacement costs have been hypothesised from 2012 onwards. Other investment costs AMAP balance Additional investments strictly related to the project have been sheets gathered from AMAP balance sheets. Operating costs AMAP Only the costs related to the water distribution service are estimation considered, on the basis of the information provided by AMAP officers. For the future, they depend on the volume of water fed into the system. Operating Revenues AMAP balance Only the revenues related to the water distribution service in sheet Palermo are considered. Information is gathered from AMAP balance sheets. For the future, they depend on the volume of water billed. Source of Funding AMAP AMAP provided information on the share of national and private funding to the project and details on the EIB loan179. Number of users, AMAP AMAP provided the number of users and of apartment units by apartment units category (domestic users equipped with a water meter smaller than 25mm; domestic users equipped with a water meter larger than 25mm; non-domestic users) and by distinguishing between the old and the rebuilt sections of the network. Data refer to 2006. Estimations have been made for the past and the future on the basis of population growth. Number of complaints AMAP Data on the number of complaints from 2002 to 2010 have been provided by AMAP. For the future, they are assumed to remain constant. Source: Authors

179 These data have been crossed-checked with the ones provided by the Ministry of Public Works

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SENSITIVITY AND SCENARIO ANALYSIS A sensitivity analysis has been carried out on the most relevant variables in order to identify the most critical ones. The aim of this exercise was to observe how a variation by ±1 percent of these variables affects the economic performance of the project. In addition to the sensitivity analysis, a scenario analysis has been performed on these variables with the aim of identifying two different future paths: a pessimistic and an optimistic one. The variables selected for the purpose of these two exercises are described in what follows:

• Yearly population growth rate: the population growth in Palermo Municipality has been estimated in compliance with the forecast made by ISTAT for the entire province of Palermo. In particular, the central scenario elaborated by ISTAT has been considered for carrying out the CBA. According to this, the population in Palermo municipality is assumed to decrease by 3.2% between 2011 and 2027. In comparison to this trend, pessimist and optimistic hypotheses have been tested via scenario analysis. In particular, variations of this variable have been made on the basis of the “low” and the “high” scenarios elaborated by ISTAT with regard to the entire province of Palermo.

Figure II.4 SCENARIOS ON POPULATION GROWTH IN PALERMO MUNICIPALITY

Base Case Pessimistic Case Optimistic Case

720,000

700,000

680,000

660,000

640,000

620,000

600,000

580,000 1997 2002 2007 2012 2017 2022 2027

Source: Authors elaboration on ISTAT forecasts

• Yearly water consumption per capita: the assumption in the CBA is that this variable remains stable from 2011 onwards and equal to the average in the years 2006 – 2010, i.e. 68.98 m3/y/inhabitant. As for the scenario analysis, the variable is made vary between the highest and the lowest values observed since 2006 (when the project was completely implemented), which are equal to 73.05 m3/y/inhabitant and 68.32 m3/y/inhabitant respectively.

• Water losses: the assumption in the CBA is that the percentage of water losses remains constant in the future and, in particular, equal to the value observed during 2006 and

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2010 (after the project’s implementation), namely 48% of the volume of water fed into the system. For the purpose of the scenario analysis, this variable is made vary by +/- 10 points, i.e. in the range 38% - 58% of total water fed in the network.

• Extraordinary maintenance: extraordinary maintenance costs have been assumed to be equal to 0.1% of total investment costs from 2012 to 2017 and to 0.5% from 2018 onwards. As for the scenario analysis, in the pessimistic scenario, these costs are expected to increase because of continuous breakages in the water distribution network and they are assumed to be equal to 0.5% of the total investment costs from 2012 to 2017 and to 1% from 2018 onwards. In the optimistic perspective, they are assumed to be equal to 0.1% of the investment costs from 2012 onwards.

The results of the sensitivity analysis show that the selected variables are “not critical”. The only exception is represented by the yearly population growth rate, which is a “less critical” variable, by causing a variation of the ENPV equal to 0.765 percent for every 1% change in the independent variable (see Table below).

Table II.7 RESULTS OF THE SENSITIVITY ANALYSIS Independent variable Variation (in Criticality Variation (in Criticality percentage value) of judgement * percentage value) of judgement the ENPV due to a ± the ERR due to a ± 1% * 1% variation variation Yearly population growth rate 0.765 Less critical 0.244 Not Critical Yearly water consumption per 0.435 Not Critical 0.150 Not Critical capita Water losses 0.401 Not Critical 0.139 Not Critical Extraordinary maintenance 0.015 Not Critical 0.004 Not Critical * Critical: ΔENPV/ERR > +1%; Less Critical: ΔENPV/ERR > +0.7%; Not critical: ΔENPV/ERR < 0.7%.

Pessimistic and optimistic scenarios have been built by considering respectively all the pessimistic and optimistic hypotheses made on the selected variables which are briefly summarised in the table below.

Table II.8 HYPOTHESES FOR THE SCENARIO ANALYSIS Optimistic scenario Pessimistic scenario Population growth varies according to ISTAT forecasts Population growth varies according to ISTAT forecasts- – high scenario. low scenario. The average water consumption per capita will be The average water consumption per capita will be equal equal and constant over years to the lowest value of and constant over years to the peak value of 73.05 68.32 m3/year recorded since project implementation m3/year recorded since project implementation (2006). (2006). Water losses will decrease by 10 points. Water losses will increase by 10 points. Extraordinary maintenance costs will account for 0.1% Extraordinary maintenance cost will account for 0.5% of from 2012 onwards. the investment costs from 2012 to 2017 and for 1% from 2018 onwards. Source: Authors

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The economic performance indicators have then been calculated for each of two combinations and the following positive results have been observed:

i) In the optimistic scenario, the ENPV would reach EUR 344,965,179 with an economic rate of return of 15.11%.

ii) In the pessimistic scenario the ENPV would be EUR 267,501,711 with an economic rate of return of 13.88%.

UNCERTAINTY ANALYSIS The uncertainty analysis has been performed with the aim of testing the elasticity of the project economic performance to some methodological assumptions. In contrast to the sensitivity analysis, it does not relate to the hypotheses made on the future trend of certain variables but it is aimed at testing the robustness of some assumptions and parameters used in the economic analysis. For the purpose of this methodological test, the three benefits included in the economic analysis have been taken into account:

• Cost of purchasing pumps: for the purpose of the CBA, it is assumed equal to EUR 185 per household, EUR 511 for each apartment block and EUR 329 for a non-domestic user.

• Time saved by users: it is assumed that households and non-domestic users have saved up to 52 hours per year, while the apartment block up to 48 hours per year.

• General maintenance costs avoided: it relates to the efficient usage and maintenance of household appliances and water supply equipment thanks to a more reliable, non- intermittent, uniform pressure, water supply.

• Share of users enjoying project benefits: the assumption of the CBA is that out a total of 115,988 users supplied by the entire distribution network, only 60% of households, 15% of apartment block and 55% of non-domestic users enjoy project benefits (see section above on the project’s effects).

The most critical variables are those for which a change of ±1% leads to a change greater than ±1% in the economic performance indicators. Results show that the share of users enjoying project benefits is the most critical variable, by causing a variation in the ENPV of 1.29%. A further critical variable is the benefit concerning the time saved by the users for the self- provision of water. As showed by the table below, a variation of ±1% of this variable lead to a variation of 1.06% in the ENPV. Negligible variables are the “cost of purchasing pumps” and the “general maintenance costs avoided”.

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Table II.9 RESULTS OF THE UNCERTAINTY ANALYSIS Independent variable Variation (in percent) of the ENPV due Criticality to a ± 1% variation judgement * Cost of purchasing pumps 0.186 Not Critical Time saved by users 1.065 Critical General maintenance costs avoided 0.017 Not Critical Share of users enjoying project benefits 1.29 Critical * Critical: ΔENPV > +1%; Less Critical: ΔENPV > +0.7%; Not critical: ΔENPV < 0.7%.

Additionally, the selected parameters have been made to vary in a range of minimum and maximum values. The following are the minimum and maximum values of the variables given in percentage of the base values: Cost of purchasing pumps, 50% ÷ 130%; Time saved by users, 50% ÷ 130%; General maintenance costs avoided, 80% ÷ 150%; Share of users enjoying project benefits, 65% ÷ 120%. The results of this exercise confirm the robustness of the project economic indicators with respect to these parameters. Where all the parameters selected are equal to the minimum values, the ENPV and the ERR remain positive, respectively equal to EUR 43,577,230 and 4.7%. On the other hand, when all maximum values are adopted for these parameters the ENPV is equal to EUR 541,851,203 and the ERR to 21.1%.

RISK ASSESSMENT The risk assessment has been performed on the four variables tested in the sensitivity analysis, although none of these was found to be critical. The aim was to further assess the robustness of the project with respect to variations of these variables. The probability of increase and decrease of these variables is assumed to have a triangular distribution, whose peak value is equal to the value adopted in the CBA (baseline case) while the upper and lower bounds are set equal to the values defined in the scenario analysis. The risk assessment has been, then, conducted on the basis of Monte Carlo simulations with 1,000 random repetitions180. The results confirm the robustness of the project’s economic performance indicators.

Table II.10 OUTPUT OF MONTE CARLO SIMULATIONS Computed Base Value ENPV (Euro) ERR (%) Reference value 315,174,161 14.68 Mean 312,578,407 14.63 Median 313,415,590 14.65 Minimum value 276,637,490 14.04 Central value 307,873,890 14.54 Maximum value 339,110,291 15.04 Probability of being not higher than the reference value 54.8% 55.7% Probability of being higher than the reference value 45.2% 44.3% Probability of being lower than zero 0% 0% Source: Authors

180 A proprietary software has been used for the purpose of this analysis.

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The mean ENPV resulting from the simulations is equal to EUR 312,578,407, slightly below the reference value (EUR 315,174,161) while the mean ERR is 14.63% (against a reference case of 14.68%). The lowest ENPV obtained is EUR 276,637,490 while the ERR is never below 14.04%.

Figure II.5 PROBABILISTIC DISTRIBUTION OF THE ENPV, EURO

1.00 Punctual probability 0.90 Cumulated probability 0.80 Reference value 0.70 Minimum 0.60 Central 0.50 Maximum 0.40 Mean 0.30 SD low 0.20 SD upp 0.10 Median 0.00 270,000,000 290,000,000 310,000,000 330,000,000

Source: Authors

Figure II.6 PROBABILISTIC DISTRIBUTION OF THE ENPV, EURO

0.12

0.10

0.08

0.06

0.04

0.02

0.00 278,199,310 281,322,950 284,446,590 287,570,230 290,693,870 293,817,510 296,941,150 300,064,790 303,188,430 306,312,070 309,435,710 312,559,350 315,682,990 318,806,630 321,930,270 325,053,910 328,177,550 331,301,191 334,424,831 337,548,471

Source: Authors

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Figure II.7 PROBABILISTIC DISTRIBUTION OF THE ERR

1.00 Punctual probability 0.90 0.80 Cumulated probability 0.70 Reference value 0.60 Minimum 0.50 Central 0.40 Maximum 0.30 Mean 0.20 SD low 0.10 SD upp 0.00 14.0% 14.2% 14.4% 14.6% 14.8% 15.0% 15.2% 15.4% Median

Source: Authors

Figure II.8 PROBABILISTIC DISTRIBUTION OF THE ERR

0.12

0.10

0.08

0.06

0.04

0.02

0.00 14.07% 14.12% 14.17% 14.22% 14.27% 14.32% 14.37% 14.42% 14.47% 14.52% 14.57% 14.62% 14.67% 14.72% 14.77% 14.82% 14.87% 14.92% 14.97% 15.02%

Source: Authors

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ANNEX III. MAP OF STAKEHOLDERS

Stakeholder General description and responsibility AMAP • AMAP has been the company in charge of water service provision in Palermo since 1956. It was set up as a municipal company but in 1999 it was transformed into a “special agency”. Since 2001 the company has operated as a limited company, fully owned by the Municipality of Palermo. • It is currently responsible for the management of the entire water cycle in Palermo, including production, distribution, sewerage and wastewater treatment. • In 1990 AMAP entrusted a staff of engineers with the drafting of the Master Plan aimed at solving the problems affecting water distribution in Palermo. • Besides promoting the project and being responsible for its implementation, AMAP financially supported the project realisation. Its contribution amounted to the 20% of the project’s total cost. R.A.T.C. • R.A.T.C. was the authority in charge of providing a technical judgement on the public works to be realised in Sicily between 1994 and 1998. It was established by the Regional Law n. 28 on 29-12-1962 with the main task of assessing the public works costing more than 100 million Lire. • On 29 September 1990 under Resolution n.17982, it approved the Master Plan and on 18 December 1990 under the Resolution n. 18204 it approved a first lot of the Master Plan concerning the three sub-networks. This lot was not immediately realised and was re- approved by the R.A.T.C. on 9 January 1997. With regard to the other interventions included in the project, they were approved between 1997 and 1998. Court of • The Court of Auditors is one of the five institutions of the European Union. It was established Auditors in 1975 in Luxembourg to audit the accounts of EU institutions. The Court is composed of one member from each EU Member State. It has no judicial functions but it is a professional external investigatory audit agency. The primary role of the court is to externally check if EU funds have been spent legally and with sound management. In doing so, the court checks the paperwork of all persons handling any income or expenditure of the Union and carries out spot checks. • Between 29 June and 9 July 2009, the Court carried out an Audit Visit to Sicily in order to examine five investment projects co-financed by the ERDF (under measure 1.02 and 1.04A of the ROP Sicilia 2000-2006) for the supply of drinking water. Among these, two interventions included in the project were assessed: the re-building of one sub-network and the completion of the Pedemontana pipe, which were completed during the period 2000-2006. European • The European Investment Bank (EIB) is the European Union's financing institution. Its Investment shareholders are the 27 Member States of the Union, which have jointly subscribed its capital. • Following the application of AMAP for a loan, the EIB commissioned an independent evaluator Bank to assess the project’s needs and rationale. On the basis of the results of this evaluation, the EIB conditioned the loan decision on the implementation of a system of automatic metering and provided to this end additional resources. • The loan was provided in five tranches between 2001 and 2008. It is expected to be paid off by AMAP by 2020. European • In 1997, the European Commission received an application for co-financing the rebuilding of Commission three sub-networks. The application was accepted and the investments were financed solely with public funds. • In 1998, a new application was submitted to the EC for the co-financing of three sub- networks, the completion of the Pedemontana pipe and the realisation of the supervision and control systems. The application was accepted on the condition that the promoter of the project (AMAP) co-financed at least 20% of the total cost of the projects. Ministry of • The Ministry of Public Works is in charge of all infrastructure matters, including roads, Public Works motorways, railways, ports, airports and other means of transport. It was set up in 1860 and suppressed under Bassanini reforms of 1999, enacted in 2001. It is now merged into the (Today Ministry of Infrastructure and Transport. Ministry of • It was the Managing Authority for Community Support Framework 1994-1999 - Objective 1 – Infrastructures) “Enlargement and Adjustment of the water supply and distribution infrastructures”. In 1997, the Ministry made available resources from this Programme to finance infrastructures for the supply of drinking water. • Between 1996 and 1998, the Ministry approved the financing of the eight interventions included in the project and, in the following years, it strictly supervised the works. • It carried out a statistical analysis on the unit costs of water infrastructures financed during the 1994-1999 period, including the water supply project in Palermo.

OTA 1 Palermo • The Optimal Territorial Ambit 1 of Palermo is made up of the 82 Municipalities of the Province of Palermo. It covers a surface of 4,992.23 Km2 with a population amounting to 1,249,577

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inhabitants (1st January 2011). • It started its operations on the 1st July 2002 and in the following years it carried out public competition for selecting private companies for the provision of the Integrated Water Service (IWS). • With regard to Palermo Municipality, the OTA 1 Palermo decided to maintain the provision of the service by AMAP. As for the other municipalities, in 2007, the management of the IWS was entrusted to the company Acque Potabili Siciliane S.p.A. (APS). • Although it is currently in liquidation, OTA 1 of Palermo asked APS to continue with the management of IWS in 51 municipalities (out of 81). With regard to other municipalities (30), excluding Palermo, OTA 1 of Palermo entrusted the Municipalities themselves with the management of the IWS. Palermo • The Municipality of Palermo was the beneficiary of EU funding for the project under Municipality assessment. Having received funds, it entrusted AMAP with the responsibility of project’s implementation. • In 1956 it set up a municipal company, namely AMAP, to operate the water service provision. Since 2001, it fully owns AMAP and the contract with it is expected to expire in 2021. • Following the appointment of OTA 1 Palermo, in 2002/2003, some responsibilities, regarding planning and investment of water infrastructure and services, were shifted from the municipality of Palermo to a higher level.

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ANNEX IV. LIST OF INTERVIEWEES

Interviewees Position Date Place Giovanni Pizzo Head of the “Task Force” within AMAP at the time of 20.09.2011 Roma project’s realisation Augusto Merletti Former official of the Ministry of Public Works 21.09.2011 Roma Gianfranco Di Project designer and manager of the construction site 22.09.2011 Palermo Trapani Cesare Arici Project designer and manager of the construction site 22.09.2011 Palermo Vincenzo Cannatella President of AMAP 22.09.2011 Palermo Mario Rosario President of AMAP at the time of project’s financing 22.09.2011 Palermo Mazzola and realisation Ignazio Meli AMAP consultant during the project ‘s financing 22.09.2011 Palermo Guido Catalano Managing Director of AMAP 23.09.2011 Palermo Giuseppe Arcuri Responsible for water distribution Department, AMAP 23.09.2011 Palermo Stefano Perlongo AMAP Officer 23.09.2011 Palermo Antonio Criminisi AMAP Officer 23.09.2011 Palermo Maurizio Bisso AMAP Officer 23.09.2011 Palermo Giovanni Sciortino AMAP Officer 23.09.2011 Palermo Michele Carabillò Responsible for Sales Department, AMAP 23.09.2011 Palermo Gaetano Lo Cicero General Director, Palermo Municipality 17.10.2011 Palermo

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ANNEX V. REFERENCES

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Vloerbergh I., Fife-Schaw C., Kelay T., Chenoweth J., Morrison G., Lundèhn C., 2007, Assessing Consumer preferences for drinking water services, Methods for Water Utilities, TECHNEAU.

Willis K.G., Scarpa R., Acutt M.,2005, Assessing water company customer preferences and willingness to pay for service improvements: A stated choice analysis, Water Resources Research., 2005, 41, W02019, doi:10.1029/2004WR003277, 17 February 2005, available at : http://www.agu.org/pubs/crossref/2005/2004WR003277.shtml

Young R. A.,1996, Measuring economic benefits for water investments and policies. World Bank Technical Paper No. 338, World Bank, Washington D.C., USA., 1996, available at : http://ideas.repec.org/p/fth/wobate/338.html

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Relevant literature review on water losses control

Bertola P., Franchini M. (edited by), Proceedings of the conference "Efficient Management of Water Networks. Design and Rehabilitation Techniques", Ferrara, May 2006, Franco Angeli editore, January 2007

Fantozzi M., Lambert A., 2007, Including the effects of pressure management in calculations of short run economic leakage levels, Paper presented at the IWA International Specialised Conference, Water Loss 2007, Bucharest, September 2007

Farley M., 2003, Non revenue water - international best practice for assessment, monitoring and control, Paper presented to 12th Annual CWWA Water, Wastewater & Solid Waste Conference, 28 September - 3 October, 2003, Atlantis, Paradise Island, Bahamas

Farley M., Trow S., 2003, Losses in Water Distribution networks. A Practitioner's Guide to Assessment, Monitoring and Control, IWA Publishing, London, UK.

Georgia Environmental Protection Division Watershed Protection Branch (EPD), 2007, Water Loss Control Programs, developed to support the “Coastal Georgia Water and Wastewater Permitting Plan for Managing Saltwater Intrusion”, Georgia, August 2007

Hathi C. and Reksten K., 2009, Rehabilitation of the drinking water pipeline network in Oslo, Norway, LESAM Conference, Miami (USA)

IWA Water Loss Task Force, 2007, Leak location and repair guidance notes, London, UK, IWA

Lambert A., 2003, The IWA Water Loss Task Force, Assessing Non-Revenue Water and its Components: A practical Approach, in Water 21- Article No 2.

Pilker R. et alt., 2008, ProWat Basic Water Loss Book: A guide to the water loss reduction, Strategy and application Part 1, published by the promoter of the Leonardo da Vinci Project ERBIL Project Consulting Engineering Co. Ltd, Ankara, Turkey.

Thorton J., 2002, Water Loss Control Manual. First edition, McGraw-Hill, New York, NY.

Trow S. and Farley M., 2004, Developing a strategy for leakage managing in water distribution systems, Water Science & Technology, 2004, Water Science & Technology, 2004, Vol. 4, no 3 (pp 149-168 ) IWA Publishing ISSN 1606-9749, selected paper from International Conference on Efficient Use and Management of Water for Urban Supply No2, Tenerife, Canary Islands , Espagne (April 2nd, 2003)

United States Environmental Protection Agency (EPA), 2009, Control and mitigation of drinking water losses in distribution systems, EPA 816-R-10-019, November 2010, http://water.epa.gov/drink/

Various Authors (edited by Brunone B., Ferrante M, and Meliconi S.), 2008, Ricerca e controllo delle perdite nelle reti di condotte, Edizioni De Agostini, Dicembre 2008

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Zacharia M., Lahlou M., 2001, Leak Detection and Water Loss Control, National Drinking Water Clearinghouse at West Virginia University, USA.

List of websites consulted http://epp.eurostat.ec.europa.eu http://pti.regione.sicilia.it http://www.amap.it http://www.atoidricopalermo.it/home.asp http://www.dps.tesoro.it/obiettivi_servizio/servizio_idrico.asp http://www.festivalacqua.org http://www.istat.it/it http://www.ofwat.gov.uk http://www.qualitas1998.net/qualityreport/20020514.htm http://www.sogesid.it

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