INSTITUTE OF URBAN ECONOMICS REVIEW OF KEY REFORMS IN THE URBAN WATER SUPPLY AND SANITATION SECTOR OF THE RUSSIAN FEDERATION Final Report Prepared for the OECD by Institute of Urban Economics Moscow 2004 2 CONTENTS Introduction .....................................................................................................................................3 Chapter 1. Technical and Economic Condition and Financial Standing of the Water Supply and Sanitation Sector in the Russian Federation....................................................................................3 1.1. Coverage with WSS Services...............................................................................................3 1.2. Physical Condition and Accident Rate of Fixed Assets .......................................................3 1.3. Investment in Fixed Assets in WSS .....................................................................................4 1.4. Financing the Sector Utilities ...............................................................................................5 1.4.1. Tariff Regulation Practices............................................................................................5 1.4.2. Collection Rate and Payment System............................................................................6 1.4.3. Installation of Water Meters and Switch to Billing for Services Based on Actual Consumption............................................................................................................................8 1.4.4. Non-cash Payments .......................................................................................................8 1.5. Financial Standing of the WSS Utilities...............................................................................8 1.5.1. Financial Performance...................................................................................................8 1.5.2. Arrears of the WSS Utilities..........................................................................................9 Chapter 2. Institutional and Legal Reforms...................................................................................10 2.1. Strategic Planning of Reform .............................................................................................10 2.1.1. Development of the Sector Development/Reform Strategy........................................10 2.1.2. Solving the Issue of the WSS Utilities’ Arrears..........................................................11 2.1.3. Medium-Term Planning of Capital Investment in the WSS Infrastructure.................11 2.1.4. Decentralization: Delegation of Responsibility and Powers to Lower Level of Government ...........................................................................................................................11 2.2. Tariff Regulation ................................................................................................................12 2.3. Technical and Environmental Regulation of the WSS.......................................................13 2.4. Ownership in Fixed Assets of the WSS..............................................................................14 2.5. Ownership Management.....................................................................................................15 2.6. Private Sector Participation ................................................................................................16 2.6.1. Emergence of a New Trend.........................................................................................16 2.6.2. Barriers to Private Business.........................................................................................16 2.7. Transparency of WSS Utilities...........................................................................................17 Chapter 3. Social Protection and Environmental Protection .........................................................17 3.1. Social Protection of Population ..........................................................................................17 3.1.1. Setting Household Tariff below Economically Sound Level......................................18 3.1.2. Lowering the Cost of Services for Some Categories of Individuals below Household Tariff......................................................................................................................................19 3.2. Affordability of WSS Services...........................................................................................21 3.3. Public Participation ............................................................................................................22 3.4. Environmental Trends ........................................................................................................22 Conclusions ...................................................................................................................................23 References .....................................................................................................................................26 Attachment 1. EBRD-funded Projects in the WSS of Russia .......................................................28 3 RUSSIAN FEDERATION Introduction Russian Federation water supply and sanitation (WSS) sector is for many years in a rather difficult situation. High deterioration of the infrastructure results in frequent accidents and interruptions in water supply and the system may technologically collapse rather soon. Significant arrears may lead to financial disintegration of the system as well. Efficiency of the Russian water utilities remains low. Prevalence of the administrative system of management, incomplete financing (primarily, from the budget), and inadequate tariff regulation still deprive the WSS utilities of the incentives to cut non-productive costs. Nevertheless, over the past four years a number of negative trends have been stopped and in some cases prevailed. Further depreciation of fixed assets, increase in accident rate, and financial losses build up were successfully dealt with. The payment collection rate from the households was noticeably increased and a budget funding deficit of the sector was reduced. Over the past four years, the legal and regulatory framework was significantly improved by establishing more advanced and fair “rules of the game,” when the Federal Subprogram “Reform and Modernization of the Housing and Communal Complex in the Russian Federation” was adopted in 2001. To elaborate on the provisions of the Subprogram, federal-level “Fundamentals of Pricing…” [32] were adopted, and Laws “On the General Principles of Tariff Control…” [18] and “On Investment Agreements…” [17] were drafted and to be ready for adoption. All the documents were developed in the spirit of the Almaty Guiding Principles; in many respects, they elaborate on principles and provide a sound foundation for the future sustainable development of the WSSS in Russian Federation. In Russian Federation over the past two years private business has become more proactively involved in operating the WSSS. Currently at least nine large companies, including three foreign operators work in the sector and some fifteen delegated management contracts have been concluded so far. Relatively brief experience of the private sector participation has already produced positive results. However, barriers inherited from the Soviet times still hinder broader private sector participation. This proves that the implementation of the Guiding Principles has just started and that there is still a lot to accomplish in order to complete the task. Chapter 1. Technical and Economic Condition and Financial Standing of the Water Supply and Sanitation Sector in the Russian Federation 1.1. Coverage with WSS Services WSS services coverage in Russian Federation remains on a rather high level. In 2003 the Institute of Urban Economic (IUE) conducted monitoring of water utilities in urban areas and reported that the level of centralized WSS coverage has been increased in 2002-2003. In large cities, water services coverage reached level of 95 percent of population; in medium-sized and small cities, it went up from 86.4 percent to 88.6 percent [4]. The increase can be attributed to the replacement of wells and street standpipes with centralized water supply in each individual household (a stand-pipe in the backyard or a tap in the house) According to the same report, sanitation services coverage has remained practically unchanged in 2000-2003, on the level of 73.3 percent in the first half of 2003. 1.2. Main Assets Physical Conditions and Accident Rate 4 In March 2003, Russian Gosstroy evaluated technical conditions of the WSS main assets. Based on the evaluation the level of water supply networks depreciation reached 65.3% and the depreciation of sanitation networks reached the level of 62.5% (as of 1 January 2003). Note that this is an “accounting depreciation” while the actual status of the main assets is extremely difficult to estimate, taking into account the insufficient financing for maintenance and operations. However, even according to accounting calculations, as of 1 January 2002 at least 29% of the water supply networks and at least 17% of the sanitation networks needed to be urgently replaced and the situation has not significantly changed over the past two years. According to the Goskomstat, 21% of the entire water pipelines needed to be urgently replaced by the end of 2003. Water losses and the magnitude