PROVIDING AND FINANCING A MUNICIPAL INFRASTRUCTURE : A LONG RUN ANALYSIS OF WATER AND SANITATION INVESTMENTS IN MILAN (1888-2000) Olivier Crespi Reghizzi Providing and financing a municipal infrastructure : a long run analysis of water and sanitation investments in Milan (1888-2000) Olivier Crespi Reghizzi 1,2 Abstract Water and sanitation services (WSS) have been mostly provided in Italy (and in Europe) at the municipal level. WSS are highly capital intensive. How water and sanitation infrastructure has been financed by Italian municipalities? What were the financing tools implemented to cover the huge investments’ costs in the short run? Who were the final end-payers in the long run? In Italy intergovernmental financial relations between municipalities and the central state changed significantly from 1861 till now : fiscal autonomy or dependence from central state transfers, balanced budget obligation or not, degree of borrowing autonomy. Water supply and sanitation legislation was largely modified too through the 20 th century in Italy. The evolution of both intergovernmental financial relations and water supply and sanitation legislation is a useful background element to our work. The major part of our paper is focused on a detailed analysis of the rolling-up phase of Milan modern water and sanitation service (1888-1924). A variety of implemented financing schemes and institutional solutions (municipal budget - fiscal resources, municipal bond and land added value capture schemes) are identified and described. The financial equilibrium of the WSS is analysed. A basic overlapping generation model is used to explore how the infrastructure costs have been allocated between the various generations. The last part of our paper adds a long run perspective (1953-2000) to the detailed analysis undertaken in the first part of the paper. Once the rolling-up phase has gone how was the infrastructure provided, expanded and financed over the 50 years after WWII ? What was the financial equilibrium of WSS ? Was it financed by municipal budget fiscal revenues or relying only on tariff revenues ? A discussion on the long run cost allocation and on the intergenerational transfers is made. Keywords: Financing history, Municipal Infrastructures, Water supply and sewerage, Milan, intergovernmental relations, 3T’s, cost sharing, deficit financing, Italy JEL: H54 – H71 - H72 - H74 - L95 - N73 - N74 - N83 - N84 - N93 - N94 Acknowledgments We wish to thank the Paris water operator Eau de Paris and the Agence Nationale de la Recherche (ANR) through the EAU&3E research project ( http://eau3e.hypotheses.org ) for their financial support. We also aknowledge CESIFO sponsorship. 1 Centre International de Recherche sur l’Environnement et le Développement (CIRED), AgroParisTech – Paris, [email protected] 2 Centro di Economia Regionale, dei Trasporti e del Turismo (CERTET), Università Commerciale Luigi Bocconi – Milano 1 Index 1 Introduction 4 2 Economic and administrative context 5 2.1 Economic context 5 2.2 Administrative areas 6 2.3 City’s development masterplans 8 2.4 Milan’s housing conditions 9 3 Rolling up a modern water and sanitation service 11 3.1 Far away water versus water from below the city ? 11 3.2 Water 13 3.3 Sanitation 14 4 Investments in Milan water and sanitation infrastructure (1888-1927) 17 4.1 Water infrastructure 18 4.2 Sanitation infrastructure 19 4.3 Investments amounts 22 4.4 Water and sanitation infrastructure in the context of urban transformation 23 5 Municipal finance (1861-1930) 25 5.1 Fiscal regime in Italy (1861-1930) 25 5.2 Taxing (or not taxing) land added value 30 5.3 Value capture policy in Milan 33 5.4 Milan’s municipality : financial constraints 36 6 Municipal financing tools 40 6.1 Borrowing regimes in Italian municipalities 40 6.2 Milan’s municipal debt 43 6.3 Financial engineering and institutions 47 6.4 Financing tools for water and sanitation infrastructure 49 7 Billing water and taxing sanitation 50 7.1 Water 50 7.2 Sanitation 54 7.3 Connection policy 56 8 Financial flows of the water and sanitation services 57 8.1 Data on Tariff revenues and OPEX 60 8.2 Data on CAPEX and debt service 61 8.3 Results on OPEX costs sharing 61 8.4 Capital expenditures and debt service 63 8.5 Comparing re-invoicing debt service and estimated debt service 68 2 8.6 Inflation 69 8.7 Intergenerational transfers 71 8.8 A basic overlapping generation model 73 9 A long run perspective (1953 -2001) 76 9.1 Municipal finance in the new republic of Italy 77 9.2 Ruling water and sanitation services 79 9.3 Financial flows of Milan’s water and sanitation service 83 9.4 Investments in water and sanitation infrastructure 86 9.5 Intergenerational transfers and long run cost allocation 89 10 Conclusion 91 11 References 94 3 1 Introduction In many developing countries water services are still in a phase of development and network expansion. The water industry is very capital intensive and requires huge lump sum investments particularly in the early phase of expanding the infrastructure. In a historical perspective how to finance these investments has constantly been a major concern, not always easy to solve. We make the assumption that adopting a “long run” historical perspective on water financing as we do in the present paper can be highly beneficial to give more depth to the present policy debate and enlighten present and future challenges both in developing countries and in Europe. Water and sanitation services (WSS) have been mostly provided in Italy (and in Europe) at the municipal level. WSS are highly capital intensive particularly in the networks’ expansion phase. How water and sanitation infrastructure rolling-up and provision has been undertaken and financed by Italian municipalities ? This paper is focused on the case study of Milan’s water and sanitation service from its genesis as a “modern” service in 1888 to the year 2000. A first and significant part of our paper (sections 2 to 8) is focused on a detailed analysis of the rolling-up phase of Milan modern water and sanitation service (1888-1924 3) using the municipality’s yearly financial report 4 as the main data source. Water infrastructure’s expansion took place in the context of a massive economic and demographic urban development (described in section 2). Section 3 analyses the key technical and institutional choices which were made in the rolling-up phase. Section 4 is focused instead on the water and sanitation infrastructure brought to completion and to the invested amounts. Water and sanitation investments were huge even if compared to the city’s development masterplan ones (§4.4). Water and sanitation in Milan (and in Italy) is very much a municipal story. How did the municipality manage to finance such a costly infrastructure ? To tackle such a question the Italian municipal fiscal regime is described (section 5) with a detailed focus on Milan’s 3 After 1924 the fascist regime abolished the autonomy of Italian municipalities ( ordinamento podestarile). In those years Milan municipal budget and reports are not available anymore. 4 Conto consuntivo dell’anno 4 municipality financial constraints (§5.4). Land value capture tools are given a specific attention too (§5.2 and §5.3). Rolling up an infrastructure requires vast amounts of money to be quickly available. What were the financing tools implemented to cover the huge investments’ costs in the short run? What was the borrowing regime of Italian Municipalities like (§ 6.1) ? What were the deficit financing tools implemented in Milan (§ 6.2, §6.3 and §6.4)? Who were the final end-payers in the long run? Refering to the OECD 3T’s methodology, were they the users or the tax payers ? To tackle such a question section 7 is focused on how water and sanitation service was charged to the users while Section 8 analyses in details the financial flows of the water and sanitation service using figures from the yearly municipal financial report and determines whether Tariff revenues were covering the full service cost or not. The key role played by long term debt and inflation is analysed too (§ 8.6). To discuss who were the end-payers and to estimate the intergenerational transfers a basic overlapping generation model is implemented (§ 8.7 and § 8.8) to explore how the infrastructure costs are allocated between the various generations. The last section (section 9) adds a long run perspective (1953-2000) to the detailed analysis undertaken in the first part of the paper. Once the rolling-up phase has gone how was the infrastructure provided, expanded and financed over the 50 years after WWII ? In Italy intergovernmental financial relations between municipalities and the central state changed significantly through the 20 th century (fiscal autonomy or dependence from central state transfers, balanced budget obligation or not). An overview of the evolution of intergovernmental financial relations in Italy is given in § 9.1 as a long run prosecution of what has been discussed in sections 5 and 6. The evolution of the regulation of the water and sanitation services in Italy is also described in § 9.2 The lasts paragraphs are focused instead on the financial flows of Milan’s water and sanitation service over the 1953-2000 time period. The (im)balance between Tariff revenues and OPEX is analysed in § 9.3. The investment policy is described too (§ 9.4). Finally the intergenerational cost-sharing over the whole time frame (1888-2000) is estimated using two different methods (§ 9.5). 2 Economic and administrative context 2.1 Economic context At Italy’s unification in 1861, Milan had only 196 109 inhabitants, less than Naples (447 000) and Turin (204 000). The city’s industry was underdeveloped and still mainly composed of 5 small manufactures producing goods for the local market since under the Austrian administration exportation of products from Lombardy to other parts of the Austrian empire were not incentivized at all (Boriani 1982).