Water in Bucharest F Ebruar Y 2011

NOTE NUMBER 326 view pointPUBLIC POLICY FOR THE PRIVATE SECTOR

Water in Bucharest F ebruar y 2011

David Earhardt, A Utility’s Efficiency Gains under a Concession Melissa Rekas, and Martina Tonizzo In March 2000 Bucharest entered into a concession contract for its

David Earhardt is water utility with the aim of turning around the utility’s faltering chief executive, and performance. Under the private operator the utility has raised Martina Tonizzo an service quality above Romanian standards and toward Western analyst, at Castalia, an advisory firm European levels. By 2008 efficiency gains had produced cost savings specializing in governance totaling US$349 million. The concessionaire has financed US$259 and regulation of infrastructure services. million in investment, without public subsidy, while keeping tariffs Melissa Rekas was well below the Romanian average. Not all water concessions have formerly a manager at the firm. Castalia carried out been as successful. What accounts for the gains under this one? an evaluation of the water concession in Bucharest. After Romania’s communist dictatorship fell on tariff level, was concluded in 2000. The win- in 1989, responsibility for water service in ning bidder, Apa Nova Bucuresti, a subsidiary Comments and questions Bucharest was transferred to RGAB, a munici- of the international water operator Veolia, took may be directed to pal water utility. By the late 1990s service was over the operation in November 2000. Chiaki Yamamoto intermittent, water pressure was low, water qual- ([email protected]). ity fell short of health standards, and there were Benefits for Bucharest outbreaks of waterborne disease. The system Apa Nova improved service markedly over the needed more than US$1 billion in investment, first 10 years of the concession while keeping but neither the municipality nor the national the connection rate high (93 percent in 2007) government was able to finance an investment and only moderately increasing the typical of this size. household bill. The municipality decided to bring in a private firm to manage the system and finance Faster gains in service quality improvements. The World Bank helped pave Water quality tests went from less than 70 per- the way by developing a public-private partner- cent compliance before the concession to 100 ship strategy, and the International Finance percent by 2006. Water supply is now continu- Corporation (IFC) supported the municipal- ous and at good pressure, and water quality ity as the transaction adviser between 1998 and exceeds Romanian and European Union stan- 2000. The competitive bidding process, based dards. Complaints fell to less than a seventh of THE WORLD BANK GROUP FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY Water in Bucharest A Utility’s Efficiency Gains under a Concession

their previous level, while customer satisfaction the period averaged 11 percent a year. While with overall service climbed from less than 50 the increase seems large, tariffs in Bucharest percent to 75 percent. remain well below the average for the 10 other Service also improved in a group of 10 Romanian cities as well as for European capitals Romanian municipal utilities without a public- such as Rome (US$1.40) or London (US$3.60). private partnership. But Bucharest’s utility, Moreover, unlike the other Romanian utilities, under the concession, improved faster and Apa Nova financed all its operations and invest- reached better levels than most of these utili- ment without subsidies. And the tariff increases ties on four of six key service indicators—water were tied to improvements in service. 2 coverage, sewerage coverage, water quality, and customer complaint level (figure 1). On two Gains in efficiency indicators—sewer blockages and pipe breaks— Significant efficiency gains allowed Apa Nova the Bucharest utility’s level of performance was to generate the operating cash flow needed to still below average in 2007. But on all the service service the utility’s loans and provide a return indicators reviewed, its performance improved on equity invested. From 2000 to 2007 Apa Nova faster than the average rate for the 10 other kept its operating cost increases below the aver- Romanian utilities. age for the other Romanian utilities. Indeed, Bucharest’s utility has the fourth lowest unit Low tariffs—and no subsidies operating costs among the 11 utilities for which Before the concession, the average combined data were available. water and wastewater tariff in Bucharest was The biggest factor in Apa Nova’s ability to around US$0.18 per cubic meter. By 2009 the contain operating costs was the gain in labor combined tariff had reached US$1.08. In local productivity achieved by the new managers. currency terms the real price increase over Bucharest’s utility went from being one of the

Figure Service quality and improvement in Bucharest compared with other Romanian cities

Above-average level, Above-average level below-average improvement and improvement 1 2

Sewerage coverage 1 Water quality Customer complaints Water coverage

0 Average Sewer blockages

Pipe breaks Level in 2007 (standard deviations from average)

2 Below-average level Below-average level, and improvement Average above-average improvement

3 2 1 0 1 2 3 Average annual change in 2000–07 (standard deviations from average)

Source: Authors’ calculations based on data from the International Benchmarking Network for Water and Sanitation Utilities (IBNET) and Apa Nova. Note: Averages are based on available data for 10 Romanian utilities operating without a public-private partnership in municipalities with more than 80,000 inhabitants. The averages do not include Bucharest’s utility. least efficient in the use of labor in Romania to Impact on costs one of the most efficient as staff per thousand To test the total impact of the concession on connections fell from 75 in 2000 to 20 in 2007. costs, a financial simulation model of Bucharest’s Clearly, labor force reductions of this water utility was constructed. The model shows magnitude were traumatic for all concerned. that if the utility had made the same investments Relations between Apa Nova’s management in improved service, but with the efficiencies and staff were difficult between 2000 and 2003. observed in Romanian utilities that do not have The management wanted to reduce the work- a public-private partnership, the total cost of ser- force rapidly, and unions led several strikes vice provision over the period 2000–08 would 3 in response. But relations improved after the have been US$349 million higher. first three years as Apa Nova started delegat- The people of Bucharest would have borne ing more responsibility to the staff and also this additional cost, through either higher taxes invested in new equipment that increased (if the municipality had been called on to sub- employee safety and productivity. In addition, sidize the company) or higher bills. Indeed, as part of the social plan included in the con- under continued public management, achiev- cession contract, Veolia sold 10 percent of Apa ing the same investment levels that Apa Nova Nova’s shares to staff in 2007. This sale brought did would have required almost doubling the staff members into a partnership with Veolia as bills for a typical household. Instead, compared equity holders and improved relations between with a scenario with no concession (and no sub- management and the staff. Workers now feel sidy), the concession reduced household bills by they are better off than before, according to 33 percent on average between 2000 and 2008 Apa Nova’s federation of unions. (figure 2). And the savings keep growing. The Apa Nova also achieved other efficiencies: 2009 bill for a typical household was just over ■■ Energy efficiency. Bucharest’s utility had half what it would have been in the scenario the second slowest rate of unit energy cost with no concession. increases in the sample. These estimates are based on conservative ■■ Collection efficiency. In 2007 Apa Nova col- assumptions. For example, the calculations lected 98 percent of bills, compared with an assume that the utility under public manage- average for the 10 other utilities of about 95 ment is just as efficient as the private company percent. in capital expenditure. But studies of public- ■■ Reduced waste. A demand-side management private partnership projects show that publicly campaign involving customer awareness, run projects tend to have higher capital expen- expanded metering, and more cost-reflective diture (Duffield 2010). tariffs reduced consumption toward Western European levels. Water consumption in 2009 Figure Average monthly household bill with and without the concession, 2000–08 was 40 percent of the 1999 level of 571 liters per capita a day. Lei 70 ■■ Reduced nonrevenue water.1 Bucharest’s utility 2 cut the level of nonrevenue water by nearly 60 Without concession (counterfactual) half, from almost 350 cubic meters per kilo- meter of network a day in 2000—the high- 50

est in the sample—to 176 in 2007. While the 40 10 other utilities reduced nonrevenue water by 6 percent a year on average, Bucharest’s 30 reduced it by 10 percent a year. With concession 20 Over the first nine years of the concession Apa Nova invested US$66 million in pipe 10 replacement and other measures to reduce leakage. In the short term this pushed up the cost of 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 service. But over the long term this investment will help keep costs and tariffs down. Source: Authors’ calculations based on Apa Nova financial statements. Water in Bucharest A Utility’s Efficiency Gains under a Concession

The estimates also assume that investment Mechanisms for regulation, monitoring, and and service improvements would have been dispute resolution were also key to success. The possible without a concession. This is doubt- technical regulator created within the munici- ful. RGAB had difficulty mobilizing finance pality was innovative and did its job well. An because it was making losses and lacked any international expert panel (whose selection viewpoint credible commitment to turn itself around. was agreed to by both the municipality and the Investments made while the company was concessionaire) has been crucial in maintain- under public management often failed to yield ing the relationship between the contracting is an open forum to the intended results. All this suggests that the parties. Because the expert panel is neutral encourage dissemination of estimated savings are a lower-bound estimate (the contract requires that the members be public policy innovations of the value that the concession has brought neither from Romania nor from the country of for private sector–led and to the citizens of Bucharest. Over the lifetime the investor, in this case France), accepted, and market-based solutions for of the concession (2000–25) the public-private readily available, the parties have turned to it development. The views partnership will save citizens a total of US$1.38 before disagreements become conflicts. published are those of the billion (present value as of 2008). authors and should not be Conclusion attributed to the World Insights from project implementation The concession of Bucharest’s water utility Bank or any other affiliated All the evidence points to the concession con- has brought its citizens higher-quality water organizations. Nor do any tract as the root cause of the improvements in services, at a lower cost, than they could have of the conclusions represent service and efficiency in Bucharest’s water and had under continued municipal provision. official policy of the World wastewater services. Yet not all concession con- The credit for this goes to the leadership of the Bank or of its Executive tracts have been as successful. In Argentina, municipality and the municipal utility in the Directors or the countries for example, concession contracts for Buenos late 1990s, which saw that private finance and they represent. Aires and several other cities and provinces ran management were needed to reverse the cycle into serious difficulties and were canceled. In of poor performance. Credit also goes to the To order additional copies Manila, where two concession contracts were managers and staff of Veolia and Apa Nova, who contact Suzanne Smith, managing editor, awarded, the concessionaire for the west zone have made the utility work; the union leaders, Room F 4K-292, went into default and had to be financially who were able to chart a course through the The World Bank, restructured. Are there distinctive features in labor force reductions; and the municipal tech- 1818 H Street, NW, the design and implementation of Bucharest’s nical regulator, which ensured that the public Washington, DC 20433. concession that contributed to its success? interest was protected throughout. The teams involved played a key part in that Telephone: success. Senior officials in the municipality 001 202 458 7281 and utility were committed to a public-private Fax: partnership. In particular, the head of the Note 001 202 522 3480 municipal utility, convinced that it could not 1. Nonrevenue water consists of leakage and commer- Email: operate effectively under direct government cial losses due to underbilling, theft, and other deficien- [email protected] management, championed the reforms. While cies in the commercial system. most of the IFC team was based in Washington, Produced by Communications DC, the team brought on board a Romanian Reference Development Incorporated adviser with strong reform credentials who was Duffield, Colin. 2010. “Report on the Performance of known and trusted by senior officials in the PPP Projects in Australia When Compared with a Printed on recycled paper government. His role was to ensure that the Representative Sample of Traditionally Procured advisory team’s technical expertise could be Infrastructure Projects.” University of Melbourne. effectively communicated to the right people Available at http://www.partnerships.vic.gov.au. in government and to stay on top of the management of the complex and fluid transaction process.

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