September 2004

ASSESSMENT AND DEVELOPMENT OF
MUNICIPAL WATER AND WASTEWATER
TARIFFS AND EFFLUENT CHARGES IN
THE DANUBE RIVER BASIN.

Volume 2: Country-Specific Issues and
Proposed Tariff and Charge Reforms:
Bosnia i Herzegovina ­ Summary













AUTHORS


Ms. Ramiza Alic / Hydro-engineering Institute, Sarajevo























TARIFFS AND CHARGES ­ VOLUME 2



PREFACE

The Danube Regional Project (DRP) consists of several components and numerous
activities, one of which was "Assessment and Development of Municipal Water and
Wastewater Tariffs and Effluent Charges in the Danube River Basin" (A grouping of
activities 1.6 and 1.7 of Project Component 1). This work often took the shorthand
name "Tariffs and Effluent Charges Project" and Phase I of this work was undertaken
by a team of country, regional, and international consultants. Phase I of the
UNDP/GEF DRP ended in mid-2004 and many of the results of Phase I the Tariffs and
Effluent Charges Project are reported in two volumes.

Volume 1 is entitled An Overview of Tariff and Effluent Charge Reform Issues and
Proposals. Volume 1 builds on all other project outputs. It reviews the methodology
and tools developed and applied by the Project team; introduces some of the
economic theory and international experience germane to design and performance of
tariffs and charges; describes general conditions, tariff regimes, and effluent
charges currently applicable to municipal water and wastewater systems in the
region; and describes and develops in a structured way a initial series of tariff,
effluent charge and related institutional reform proposals.

Volume 2 is entitled Country-Specific Issues and Proposed Tariff and Charge
Reforms. It consists of country reports for each of the seven countries examined
most extensively by our project. Each country report, in turn, consists of three
documents: a case study, a national profile, and a brief introduction and summary
document. The principle author(s) of the seven country reports were the country
consultants of the Project Team.

The authors of the Volume 2 components prepared these documents in 2003 and
early 2004. The documents are as up to date as the authors could make them,
usually including some discussion of anticipated changes or legislation under
development. Still, the reader should be advised that an extended review process
may have meant that new data are now available and some of the institutional detail
pertaining to a specific country or case study community may now be out of date.

All documents in electronic version ­ Volume 1 and Volume 2 - may be read or
printed from the DRP web site (www.undp-drp.org), from the page Activities /
Policies / Tariffs and Charges / Final Reports Phase 1.

TARIFFS AND CHARGES ­ VOLUME 2




We want to thank the authors of these country-specific documents for their
professional care and personal devotion to the Tariffs and Effluent Charges Project.
It has been a pleasure to work with, and learn from, them throughout the course of
the Project.

One purpose of the Tariffs and Effluent Charges Project was to promote a structured
discussion that would encourage further consideration, testing, and adoption of
various tariff and effluent charge reform proposals. As leaders and coordinators of
the Project, the interested reader is welcome to contact either of us with questions
or suggestions regarding the discussion and proposals included in either volume of
the Project reports. We will forward questions or issues better addressed by the
authors of these country-specific documents directly to them.

Glenn Morris: glennmorris@bellsouth.net
András Kis: kis.andras@makk.zpok.hu



TARIFFS AND CHARGES ­ VOLUME 2

Overview of Issues and Proposed Tariff and Charge Reforms: Bosnia and Herzegovina
3
Executive Summary

The Country Report developed within the UNDP/GEF project include a "National Profile" that
provides descriptions of existing situation in water sector in B&H and "Case Study" that provides
descriptions of existing situation in selected municipal water and wastewater utility.

The National Profile is organized in the following way:
Introduction describe mainly Country back ground and characteristic of River Basin in B&H. Chapters
2 to 4 deals with administrative units in B&H, institutional and legislation framework related the
water sector in B&H (describe state, entity, cantonal, municipal level). Chapter 5 covers Management
units that describe mainly characteristics of water and wastewater utilities in B&H such as service
area, management, administration, staffing, customer relations, and type of services, accounting
system, rate structure and ownership. Chapters 6 and 11 deals with data: on water and wastewater
service users, water and wastewater production, distribution, processing, wastewater effluent,
economic data, infrastructure and economic regulation. Chapter 12 describe of status of national water
sector reform. Chapter 13 and 14 are composed of recommendations for institutional and financial
water and wastewater utilities.

The Case Study provides information and data of selected pilot municipal water and wastewater
utility. Data are related regulatory, management and financial aspects. These aspects are described in
Chapters 2, 3 and 4.The investment needs of pilot utility were then listed, prioritized and phased to
implementation stages of short term priority investments, sustainable investments, and upgrade
investments into a higher level of service. These phases also represent the urgency of the identified
investments. The investments are described in Chapter 5. In chapter 6 scenarios are defined for the
purpose of modeling with the ASTEC Model (Accounts Simulation for Tariffs and Effluent Charges
Model), partly based on the investment priorities of Chapter 5, but also assessing other features, such
as the requirement to recover costs and the availability of grant financing for the investments.
Chapter 7 presents the results of the scenarios, supplemented with an analysis of the tariff and current
account consequences, while Chapter 8 examines how the economic burden falling on service users
changes through the scenarios.
Finally, in Chapter 9 policy recommendations are offered, as a way of concluding the case study.

Water and wastewater services are now generally provided in municipalities by a "Water and
Wastewater Utility" (W&WWU), a company that usually provides only water and sewerage services.
In earlier years and in smaller towns, water and sewerage were included along with many other
municipal services, such as street maintenance, central heating, care of parks and cemeteries, solid
waste collection and other services. Some municipalities still operate that way. All these services were
provided by a public company under the municipality called a communal services company.
W&WWU have during the past decade experienced a number of changes in their working
environment which have weakened their performance capability drastically. Even before the war
(1992 ­ 1995) there was a serious disrepair of municipal services caused by strictly controlled and
non-cost recovering pricing that did not allow proper investment and maintenance. The situation was
compounded by serious operational deficiencies and outdated managerial practices. The sector was
highly centralized and was operated in accordance with socialistic principles. The four-year war led to
significant destruction and deterioration of facilities. It also caused major disruptions in operation and
maintenance of utility systems, from both neglect and from extensive dislocation of population,
including management and operators of the utilities. In some of the utilities practically none of the
present management or staff has experience from a "normally" operating utility. To great extent utility
know-how, maps and records are lost. Continuing poor financial situation in the country is effectively
hampering efforts to improve water and wastewater services.
Most water utilities have rate structures that need to be changed and rates that need to be increased, in
order to cover costs.
4
UNDP/GEF Danube Regional Project
The customer charges varied, based on the size of the meter or type of service. Other water utilities
charged a volume rate that was uniform for all water sold (a common practice for most water utilities).
The water utilities used a form of inclining rate structure in which larger users, such as industrial
customers, are charged a higher (but still uniform within their class) rate per cubic meter than the
smaller users such as residential customers.
Almost all water utilities metered most of the consumption of large commercial/industrial customers.
For residential customers, if the water utility did not have working meters for residential homes or
apartment buildings, the amounts charged were based on estimates. The bills were based on either an
estimate of use based on historical usage (before the war), a lump sum per person estimated at the
connection, or an amount based on an estimated per capita consumption (often very low) for an
estimated number of persons at that connection.

Federation of Bosnia and Herzegovina and Republika Srpska have its own Water laws that impact the
delivery of water and wastewater services, affecting most aspects of technical, administrative and
financial matters

According to the Federal Law on Municipal activities (Official Gazette of Socialist Republic of B&H
No. 20, July 26, 1990) and Law on Municipal activities of RS (Official Gazette of RS, No. 11/95), the
Municipal Assembly defines the method of service pricing, but the service provider defines the price
of the service
The first study of countrywide reform of the water and wastewater sector started at April 1999. The
key recommendations were given for reform of water sector such as for reform of municipal water and
wastewater utility.
Main results of the analysis and simulation in the case study the UNDP/GEF project could be
summarized in following recommendations:
· Improved accounting information by introducing a second, parallel system that should be
structured around "cost centers", and include enough detail so that financial reports can be
structured to accommodate the data needs of the management for tariff setting, investment
decisions, etc.
· Increased autonomy from municipal from two main reasons:
- Reforms will lead to better performance, and service users, the constituency of the
Municipal Board, will be satisfied.
- A well performing utility may be sold at an attractive price, resulting in revenues of
privatization (as long as the Municipality receives those revenues, and not the central
government)
· Improve the performance of MWWU Doboj, both financially and with regards to service level.
Personnel costs make up 57% of all O&M costs while there is a claim that many of the employees
are redundant and under trained. A reduced and partly replaced workforce would result in lower
personnel costs and more effective operations. There are numerous other opportunities, including
some investments, which will result in net cost savings at the company, or effective strategies to
improve collection rates. Setting priorities among such cost-saving measures, carefully
implementing them, and coordinating them with other issues, such as tariff reforms, is a
challenging, but potentially greatly rewarding exercise for the company leadership. Starting with
measures that stabilize the operations of the utility, e.g. besides ensuring improved or sustainable
service, also reduce costs, seems to be a logical way to proceed
· Main conclusions regarding tariff changes are the following:
- Any tariff reform should be based on good accounting information and proper financial
analysis, and accompanied with an explanation of the use of the revenues;
- In order to attain a fair and efficient tariff design, the tariffs of households will need to
increase at a higher rate, than the tariffs of other consumer groups. In fact, the tariffs of some
of the other SUs may stay constant or may even be reduced;
Ms. Ramiza Alic / Hydro-engineering Institute, Sarajevo
Bosnia and Herzegovina
Overview of Issues and Proposed Tariff and Charge Reforms: Bosnia and Herzegovina
5
- Keeping a two part tariff, and increasing both the fixed and the variable component will result
in an economically more efficient tariff regime, than if only the variable component was
increased to cost recovering levels.

Document Outline