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:
Bulgaria Case Study
AUTHORS
Dimitar Tropchev
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pertaining to a specific country or case study community may now be out of date.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
UNDP/GEF Danube Regional Project
Strengthening the Implementation Capacities for Nutrient Reduction and
Transboundary Cooperation in the Danube River Basin
Assessment and Development of Municipal Water
and Wastewater Tariffs and Effluent Charges in
the Danube River Basin
Project Components 1.6 and 1.7:
Output 1.6 Policy reform and legislation measures for the development of cost-
covering concepts for water and wastewater tariffs, focusing on nutrient reduction
and control of dangerous substances
Output 1.7 Implementation of effective systems of water pollution charges, fines and
incentives, focusing on nutrients and dangerous substances
Volume 2: Country-Specific Issues and Proposed
Tariff and Charge Reforms: Bulgaria - Case Study
September, 2004
Prepared by:
Dimitar Tropchev
Prepared by Dimitar Tropchev
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 1
Table of Content:
1
Introduction .............................................................................................................. 5
1.1
Purpose of the Case Study....................................................................................................5
1.2
Case Selection and Data Collection .....................................................................................5
2
Case Settings ............................................................................................................. 7
2.1
Pleven Region General Information.................................................................................7
2.2
The Company RWSSC Pleven SPLTD............................................................................9
2.2.1
Financial and Operational Developments ................................................................11
2.2.2
Scope of Service, Customer Categories and Ownership Structure........................13
2.2.3
Water and Wastewater Tariffs..................................................................................13
2.2.4
Recent Developments .................................................................................................14
2.3
The Place of Pleven RWSSC in the National System.......................................................15
3
Issues and Challenges............................................................................................. 17
3.1
Water Losses and Investment Needs.................................................................................17
3.2
Collection of Receivables Outstanding..............................................................................18
3.3
Tariff Calculations Do Not Reflect the Economic Cost of Capital .................................19
4
Scenarios Settings................................................................................................... 20
4.1
Scenarios Description and Summary .............................................................................20
4.2
Scenarios Results.................................................................................................................23
5
Scenario Findings and Conclusions ...................................................................... 27
5.1
Basic Scenarios (Baseline 1A and Baseline 1B) ................................................................28
5.1.1
Replicating the Original Company Data for 2001 ...................................................28
5.1.2
Introducing Cost Recovery ........................................................................................29
5.1.3
Baseline Developments Scenarios Summary.........................................................29
5.2
Sustainable Scenario...........................................................................................................30
5.2.1
Cost of Non-Payers are Covered ...............................................................................30
5.2.2
Improved Payments of Uncollected Receivables......................................................30
5.2.3
Water Losses Reduced to 22% ..................................................................................30
5.2.4
Sustainable Scenario Summary Findings and Conclusions.................................31
5.2.5
The Introduction of a Two-Part Tariff.....................................................................32
5.3
Upgrade Scenario................................................................................................................32
5.3.1
Improvement in Wastewater Network Collection and Treatment As
Well As Investment in the WWTP Efficiency and Modernization ........................33
5.3.2
Scenario Summary Findings and Conclusions.........................................................33
6
Burden Indices Estimation .................................................................................... 35
6.1
Ability of Service Users to Cope with Increasing Tariff Levels......................................35
6.2
Overview of Households Income and Expenditure in Bulgaria......................................36
6.3
Scenarios Burden Index Estimations ................................................................................38
7
Reform Proposals ................................................................................................... 40
7.1
Overall Country Developments in the Water Sector .......................................................40
7.2
Case Specific Reform Proposals ........................................................................................40
7.2.1
Tariffs Setting Calculations .......................................................................................41
7.2.2
Receivables and Debt Collection ...............................................................................41
7.2.3
Leakage Reduction .....................................................................................................42
7.2.4
Future Investment Needs and Available Sources ....................................................42
7.2.5
Timing of Reforms......................................................................................................43
Prepared by Dimitar Tropchev
2
UNDP/GEF Danube Regional Project
8
Appendix I. Household Income and Expenditures (1995 2002)...................... 44
8.1
Average Households Income by Sources ..........................................................................44
8.2
Average Household Expenditure by Item.........................................................................45
9
Appendix II. Additional Scenario Developments Including
Marginal Cost Pricing ........................................................................................... 46
9.1
Scenarios Description .........................................................................................................46
9.2
Summary Results ................................................................................................................47
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 3
List of Abbreviations:
ASTEC Model
Accounts Simulation for Tariffs and Effluent Charges Model
BE
Budget Entities (category of service users)
BGN
Local currency: Bulgarian leva after denomination since 1999
BOD5
Biological Oxygen Demand after 5 days
CEE
Central and Eastern Europe
CoM
Council of Ministers
EBRD
European Bank for Reconstruction and Development
HH
Households (service users category)
I&A
Industry
and
Agriculture (service users category)
ING
Internationale Nederlanden Group
ISPA
Instrument for Structural Policies for Pre-Accession
mln
million
MoEW
Ministry of Environment and Waters
MoRDPW
Ministry of Regional Developments and Public Works
MU
Management
Unit
NEPF
National Environmental Protection Fund
NSI
National Statistical Institute
OLP
Basic Central Bank Interest Rate
RIOS
Regional Inspection for Environment Protection
RWSSC
Regional Water Supply and Sewage Company
SNT
Sewage without treatment as opposed to sewage with treatment (ST)
SPLTD
Sole Proprietorship, Limited Liability Company
SS
Suspended
Solids
SU
Service
User
USD
US
dollar
VAT
Value Added Tax
W
Water, usually referred to the type of service provided
WB
World
Bank
WSc
Water Supply and Sewage as composite goods
WW
Wastewater,
usually
referred
to the type of service provided
WWTP Wastewater
Treatment
Plant
Prepared by Dimitar Tropchev
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 5
1 Introduction
1.1 Purpose of the Case Study
The aim of this case study is with an example to summarize and synthesize the information we have
gathered on the structure and functioning of the water supply and sewage sector in Bulgaria. We will
not only show how a typical water supply and sewage company operates in Bulgaria but also analyze
how its situation (financial, operational, etc.) and influence on the environment and community can be
improved through a system of appropriate tariffs and charges and other measures, e.g. reduction of
leakage applied to a set of different scenarios. Our task will be using the spreadsheet model developed
as part of the project to find practical solutions for existing problems of a particular water supply and
sewage company Pleven SPLTD.
The scenarios will help us to clarify the various aspects of the financial data available for the company
and the possibilities for future policy developments with respect to the existing problems. In the text
that will follow, we present four different scenarios that capture the most pressing issues for the
company and possible ways to solve them. The first problem is the need for investment in new
equipment and modernization of the existing network. Our findings showed that with the present level
of tariffs and charges and collection rate of receivables the self-financing option would not be feasible.
How an introduction of a two-part tariff could possibly change that situation would be part of our
reform proposal that have to do with that particular issue. The second dilemma, how to reduce leakage
(to what extent) and at the same time avoid unnecessary investment will be also analyzed. In addition
we will also try to examine how the improved collection of receivables will benefit both the company
and the community it serves. All these scenarios will be accompanied by careful examination of the
data gathered and analysis of the company operations for the last six years for which information was
available.
In the reform proposals section we will summarize the basic findings and evaluate their possible
impact on Pleven RWSSC and its current situation. The feasibility and efficiency factor of such
reforms would also be an issue of consideration in view of the ongoing reforms in the Bulgarian water
sector. We will also show what would be the overall effect of each reform with regard to consumption
and income burden to the existing categories of service users. We will mainly concentrate on those
recommendations that are applicable to the Bulgarian water sector given the local conditions and
based on experts' opinions that we have gathered.
1.2 Case Selection and Data Collection
At the beginning of our discussion which water supply and sewage company to choose for our case
study, the availability of data seemed the most plausible and important criteria since at many
Bulgarian water companies good quality accounting and financial information is difficult to access.
Later on, however, we have reexamined our arguments and come to the conclusion that it should be
such a company that have not only significant relevance to the project target - Danube river, but is a
representative for a typical water service provider as well. That is why we have selected Pleven
RWSSC. First, Pleven region is directly linked with the Danube river basin. The major city Pleven is
situated in the Danube valley, 40 km from the river and 70 km from the Balkan mountain. There are
three rivers of importance as sources of water supply and channels for taking away the wastewaters
Vit, Ossum (both flow into the Danube) and Tutchenitsa, which flows into Vit. The latter one goes
through the city but is contaminated by the wastewaters from households. The wastewaters are directly
discharged into the river and that is why it can be used as a source for potable water only after a high
level of treatment. That the region has significant impact for the Danube water pollution is indicated
by a study conducted for World Bank in 1990 on the Vit river catchment. According to that study, Vit
Prepared by Dimitar Tropchev
6
UNDP/GEF Danube Regional Project
was responsible for only 0.2% of the Danube river flow but for about 4% of the load of BOD5 and
0.5% of the SS load. Nutrient reduction is therefore a key concern in the region. In short, the
applicability of the Pleven case to the target group of water companies suitable for the project topic
seems high and that was one of the reasons why we have chosen it.
The second reason why we have chosen Pleven RWSSC is that it is a typical (representative) for
Bulgaria regional water services management unit of a middle size (slightly above the average by
scope of service and financial results), with the state acting as an owner (Ministry of Regional
Development and Public Works). The fact that it is a regional company, a specific feature for
Bulgaria, means that there are also some smaller companies (branches) under its control in the
framework of the regional administrative and territorial division of the country. So the following
municipalities are represented in the water service sector by the respective branches of Pleven
RWSSC: Pleven, Dolni Dabnik, Dolna Mitropolia, Belene, Iskar, Kneza, Levski, Nikopol, Pordim,
Cherven Briag and Guliantzi.
Of course, the availability of data remained an important factor and in a way, we were lucky with
finding all the relevant information because the World Bank has already settled a loan with Pleven
RWSSC. That required a complete financial picture and analysis of the company and its operations
and the World Bank consultants had already done it. Moreover the range of the data is for the last five
years including some of the most recent (2003) developments and plans. The sources of the data so far
are: the water management unit reports, the World Bank reports, the Ministry of the Regional
Development and Public Works, the Ministry of Environment and Waters, some basic financial
reports published on yearly basis in the Bulgarian Enterprises Information System, the National
Statistical Institute, the State newspaper and other relevant information that can be found on internet.
We have verified the consistency of the information and tried to separate the ambiguous items or
emphasize their uncertainty.
One example for such ambiguity was the calculation of the annual depreciation figure.1 It was an
important estimate since the company had used it as one of the cost items to justify the tariff levels.
What we found out was that fixed assets had been re-valued three times in the `90s. In 1991 with
Decree #179 of the Council of Ministers when the water supply and sewage companies were
transformed from state owned public companies to trading holdings. That led to an increase in the
capital of the water companies that have to be registered in the trading register. The second revaluation
was in 1997 (Decree #238 of the CoM) and was forced by the recent inflationary processes. The last
revaluation is a result of the introduction of the international accounting standards in Bulgaria. Only
fixed assets that are not state (public) or municipal property will be re-valued according to the Water
Law. That will mean that the entire water supply and sewage network and the connected equipment
will be left aside. With this in mind we decided to replace the figure in our spreadsheet model with the
annual investment.2
1 Depreciation is a monetary allowance to allow for actual wear and tear on long-lived plant and equipment over
time. Depreciation can be based on estimates of actual wear and tear (useful for management decisions) or a
standard schedule used for tax or rate setting purposes. Depreciation is not amortization. Despite the common
use cognates of amortization to mean depreciation in many CEE language vocabularies, in English amortization
is a financial term that refers to the payments designed to pay off a debt. As such, it may have little or nothing to
do with the physical depreciation of an asset; amortization is determined by the terms under which debt, which
may have been used to purchase an asset, is financed.
2 More on this issue will be discussed in the scenario evaluation section.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 7
2 Case
Settings
In this section we will introduce the management unit RWSSC Pleven SPLTD. We will try to
develop a dynamic perspective of the company by showing its development within a five-year period
of time and by analyzing its current place in the water service sector in Bulgaria. The scope of service
and the financial results from operations will be part of the comparison criteria. Another part would be
the technical efficiency aspect like leakage control and the financial efficiency (collection of
receivables) of the company. However, before going into this analysis let me first present you with
brief information about the area that Pleven RWSSC serves.
2.1 Pleven Region General Information
Figure 1
Administrative Division of the Republic of Bulgaria (regional).
Geographical location: Pleven region is situated in the Central part of Northern Bulgaria, in the
middle of the Danube Plain and it stretches from the Belene Lowlands and the middle flow of the
Ossum River to the East up to the Iskar River to the West, and from the Danube River in the North
as far as the Balkan Range to the South. Within this area the region occupies 3.9% of the territory of
Bulgaria. It is a sloping land from South to North. The climate is moderate continental. The Iskar, Vit,
Ossum and the Danube River flow through its territory. There are also a number of dams built there.
The region has got a very good infrastructure, which is suitable for servicing the economical and
social sphere. It includes about 200 km of railroads, ensuring the connection to the Black Sea, the
Danube River and to the capital city of Sofia, as well as 1300 km of motorways. There function 4
ports at the Danube River. The following municipalities are within Pleven region: Pleven, Dolni
Dabnik, Dolna Mitropolia, Belene, Iskar, Kneza, Levski, Nikopol, Pordim, Cherven Briag and
Prepared by Dimitar Tropchev
8
UNDP/GEF Danube Regional Project
Guliantzi.
Figure 2
Municipalities within Pleven Region.
Economy: This region is rich in natural resources of good quality such as refractory clay, quarry
material, raw materials for the cement industry, crude oil and gas. The humus soil is a good
prerequisite for the development of agriculture and food industry. The knitwear industry is traditional
for this region. On the territory of Pleven district there are about 155 state-owned, municipal, and co-
operative companies, enterprises and institutes. The main fields of production are: machine-building
and metal-processing industry, electro-technical and electronic industry, chemical and petrol refining
industry, construction materials industry, timber-processing industry, glass industry, leather and
leather-clothing and footwear industry, textile industry, etc. The range of production comprises of:
lubricants, oils, petrol, motor and electric fork trucks, hydraulic presses, min-compressors, dye-casting
and pressure-casting machines, steel and iron-castings, aluminium; castings for machine-building,
electronic and automobile industries; heat-exchangers, central heating facilities, wines, alcoholic
drinks; beer, milk and milk products, meat and sausages, canned fruit and vegetables, knitwear and
ready-made garments, tailoring and auxiliary fabrics.
First of all let me note that 1996 and 1997 were turbulent years for the Bulgarian economy. The local
currency (Bulgarian Lev) went down from 130 leva per dollar (as of June 1996) to 500 leva per dollar
at the end of the same year. 1997 developments were even worse. The 3,000 leva per dollar limit was
almost reached in February and the introduction of the currency board seemed to be the only plausible
solution for the moment. Since July 1, 1997 Bulgaria has been under a Currency Board Regime (lev
was fixed to German mark) and the currency stabilized around the 1,800 leva per dollar till 1999 when
the lev was denominated (three zeros were dropped). Following the economic crisis in 1996/97 with
negative real GDP growth, the currency board arrangement has helped to stabilize the economy and to
achieve real GDP growth of close to 4% on average since 1998. Inflation came down from above
1,000% on average in 1997 to 9.8% on average since then.3
Water Resources: The water currents and water areas take up 3.6% of the territory of Pleven region
3 Data taken from Bulgarian National Bank Reports and the Commission of the European Communities "2002
Regular Report on Bulgaria's Progress Towards Accession".
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 9
compared with 2% for the country. This is due to the Danube River and its tributaries Iskar, Vit and
Ossum as well as to the artificial water reservoirs such as the dams Telish and Gorni Dabnik. In the
district there are 56 micro dams, which are owned by the municipality, and 12 dams, which are
property of the association "Irrigation systems" and whose area is insufficient and hinders their
management. The irrigation systems created in the past are almost not functioning because of the high
price of water, the changes in the land property and the neglecting of the equipment. Outside of the
territory of the district on the territory of Lovech District- are the water basins "Cherni Ossum",
"Steneto" and "Zlatna Panega". Frequent deviances from the standard of the water provided to Pleven
are observed. One solution of the problem is the building of "Additional water supply to Troyan,
Lovech and Pleven from dam "Cherni Ossum".
2.2 The Company RWSSC Pleven SPLTD
The activity of RWSSC Pleven SPLTD is spread over the territory of 11 municipalities, including 13
towns and 105 villages with population about 320 000 people. In technical aspect the water supply is
provided by 19 groups (workshops for technical assistance, repair and calibration of water meters)
with 3059 km water-conduit net. The main pump stations are 130, and the hopper ones 222. The
total installed capacity is 19,401 kilo-Watts/h. In 5 towns there are built up sewerage systems with
total length of the net 294 km. The purifying of the refuse waters in Pleven and some of the nearby
enterprises is accomplished by the purifying station, nearby the village of Bozhuritsa, let under
operation in 1991 with maximal capacity for purifying of 1850l/sec. for the first stage. Another five
municipalities use industrial wastewaters treatment plants.
On the next page a detailed table (Table 1) with relevant company information is presented. Note that
due to the high inflation and currency devaluation, the 1996 and 1997 figures from Table 1 below
should be treated with caution when costs or other financial indicators are compared. These two years
are included for information purposes mainly and the analysis will concentrate on the rest of the
available data. On first glance the most distinct developments for the period in question are the high
energy costs for 2001 (38% of total operating costs) and the increase in receivables as a percentage of
total operational revenue from 1998 onwards (from 9% to 18%). Water-produced had a decrease of
25% between 1998 and 2001 but total operational costs and revenue remain almost unchanged (unit
costs and tariffs went up). There is a noticeable reduction in water losses from 58% in 1997 to less
than 52% in 2001. More detailed comments on the operational and financial trends and developments
of Pleven RWSSC will follow in the section after the table.
Prepared by Dimitar Tropchev
10
UNDP/GEF Danube Regional Project
Table 1
Summary Information for RWSSC Pleven SPLTD (end of year data, 1996 2001).
Service
Information
1996 1997 1998 1999 2000 2001
Total
Population
346,000 346,000 327,000 322,000 319,000 315,000
Water connections
77,016
77,138
77,250 77,343 77,415 77,468
Sewage connections
12,123
12,546 12,642 12,679 12,718 12,762
Total
number
of
staff
1,053 1,070 1,068 1,068 1,076 1,062
Total
operating
cost
('000
USD)
3,446 4,300 7,247 7,775 7,365 7,143
Cost
of
hired
services
('000
USD) 190 271 748 828 631 515
Other
Materials
('000
USD)
657 895 1,517 1,586 1,657 1,585
Personnel
cost
('000
USD)
1,521 2,160 3,325 3,702 3,189 3,008
Energy cost ('000 USD)
936
902
1,065
1,010
1,247
2,731
Total
fixed
assets
('000
USD)
2,556 7,325 9,332 8,603 7,981 9,311
Water supply coverage (%)
100%
100% 100% 100% 100% 100%
Water produced (`000 m3) 44,329
44,987
44,640
37,625 36,437 33,566
Water billed (`000 m3) 24,066
18,899
19,897
18,701 18,344 16,178
Number of repair bursts per year
3,580
3,276
4,323
5,015
5,202
4,287
Sewage billed (`000 m3) 19,570
15,008
14,270
14,992 12,604 11,435
Treated in WWTP (`000 m3) 0 0 0 13,319
10,946
9,949
Unaccounted for water (`000 m3) 20,263
26,088
24,743
18,924 18,093 17,388
Unaccounted
for
water
(%)
45.70% 58.00% 55.40% 50.30% 49.66% 51.80%
Metering
(%
of
quantity
billed)
90% 92% 95% 98% 95% 95.50%
Personnel cost/Total operating cost
44% 50% 46% 48% 43% 42%
Energy
cost/Total
operating
cost 27% 21% 15% 13% 17% 38%
Average tariff (water supply, USD/m3)
0.10 0.19 0.28 0.32 0.31 0.34
Average charge (sewage + treatment)
(USD/m3)
0.06 0.10 0.15 0.15 0.12 0.15
Unit operational cost (USD/m3 water
billed)
0.14 0.23 0.36 0.42 0.40 0.44
Receivables ('000 USD)
595 543 654 972 1,228 1,338
Operational
revenue
('000
USD)
3,161 4,870 7,683 8,271 7,359 7,249
Receivables/Operational revenue (%)
19% 11% 9% 12% 17% 18%
Number
of
months
due
2.3 1.3 1.0 1.4 2.0 2.2
Collection efficiency
82% 90% 92% 90% 88% 85%
Source: World Bank Loan Program Reports, MRDPW.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 11
2.2.1 Financial and Operational Developments
Operational Trends: If we are to track the developments in the operations of Pleven RWSSC several
trends are dominating the picture. For the period in question (1996 2001) the total amount of water
supplied had decreased with approximately 10 million m3 (from 44.3 mln to less than 34 mln). At the
same time the water billed to customers went down from 24 to 16 million m3 but the percentage of
water losses increase from 46% in 1996 to 52% in the year 2001. However, the present positive efforts
of the management to solve the problem should be noted. If we look at the trend from 1997 onward,
the water losses had decreased from 26.1 mln cubic meters to 17.4 mln cubic meters. The decrease is
especially noticeable after 1998. It was a result of the management's efforts and investment financed
through government agreement with World Bank loan that targeted the repair and replacement of
water supply network and improved water metering.
It is worth noting that the situation of Pleven RWSSC is not much different from the national average,
which is 49% (see Table 3) as indicated from the most recent data we have for 2002. However, this
remains a high number. There are many reasons behind. One of them could be that leakage does not
decrease together with water consumption due to constant pressure along the pipelines and the state of
the available network that needs reconstruction and repair. Other reasons are the insufficient funds for
replacement of the old network and investment in new equipment, the negative demographic trends
and the decreased purchasing power of the consumers, which lead to lower consumption, the lack of
legal enforcement mechanism how to collect the receivables outstanding and the last but not the least,
the down turn in industrial activity in the region (big state-owned factories were closed or work with
minimum capacity).
Figure 3
Water and Sewage Production and Water Losses
Water Supply and Sewage Developments -- Pleven RWSSC
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1996
1997
1998
1999
2000
2001
Water produced ('000 m 3)
Water billed ('000 m3)
Unaccounted for w ater ('000 m3)
Number of repair bursts per year
Sew age billed ('000 m3)
Another finding from Table 1 and later confirmed in Table 3 is the number of employees as compared
with the population in the region that uses the services of the water company. The data for 2002
indicates that Pleven RWSSC serves 4% of the population in Bulgaria but account for 7.7% of the
total staff in the sector. While there could be a reasons for that beyond our knowledge, the finding
deserve attention whenever the efficiency of the enterprise's structure and management is considered.
Financial developments: From the graph below (Figure 4) it is clear that with operational cost moving
Prepared by Dimitar Tropchev
12
UNDP/GEF Danube Regional Project
together with operational revenue funds were not internally available to make many required
improvements beyond those made using the World Bank loan. Moreover, it appears that the revenues
in excess of operating costs were only marginally sufficient for the system maintenance as we can see
from the deterioration of selected technical parameters. The increase in water losses as compared to
the water billed to service users for the last three years mark one of the biggest challenges for the
management of the company. Nevertheless, by 2001, the company has reconstructed with internal
financing and the help of World Bank 6,300 metres of water mains. The total amount of the
investments was BGN 1.7 million. The money was used for reconstruction of nine projects in Pleven
district.
Figure 4
Operating Costs, Revenue and Collection of Receivables
Financial Developmets - Pleven RWSSC (1996-2001)
30,000
25,000
Water Billed
20,000
('000 cubic
meters)
15,000
10,000
5,000
0
1996
1997
1998
1999
2000
2001
Total operating cost (incl. depr.) ('000 USD)
Receivables ('000 USD)
Operational revenue ('000 USD)
Another key financial issue is the collection of the receivables outstanding. In February 2002 the
amount of the unpaid fees from the subscribers of Water Supply and Sewerage-Pleven was BGN 1.7
million.4 The total amount of the unpaid bills for water was BGN 900 000. The legal entities owed
BGN 500,000, the budget structures BGN 300,000. The company had initiated 25 court cases
against the biggest debtors. Some of the companies have paid their debts immediately; others had
reached agreements with the company for rescheduling of the payments.
Of course there are objective reasons that lay outside of the scope of the current management of the
company. We have to note that Pleven RWSS was initially constructed and designed to be part of a
huge national network with enormous for the size of the country capacity that was supposed to serve
past heavy industrial demand. Because of that in the Pleven and other cases Bulgarian water systems
have ended up with overcapacity that increases costs for any given level of consumption.
Another part of the problem also inherited from the past was that water services companies did not
have to take any financial or strategic decisions by themselves. Every action with regard to tariff
setting, investment or operating decisions were centrally planned and just locally executed. As a result
cost recovery or sustainable investment were never concerns of the local management. The joint social
management in the water services sector continues nowadays as well. Even if the manager would like
to increase prices to improve the long-run efficiency of service provision, the ministry or the
municipality on which territory the company operates will object to such changes if not
"appropriately" justified by law.
4 Source: BTA (Feb 14, 2002).
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 13
2.2.2 Scope of Service, Customer Categories and Ownership Structure
Pleven RWSSC as most such companies in Bulgaria has almost 100% of the water supply and more
than 60% of the sewage network in place. However, for the sewage network there is a large
discrepancy between the situation in the villages and that in cities. More than 95% of the water billed
to consumers is metered. The general division of service users in Bulgaria is applicable for the Pleven
case as well: population, industry and agriculture and budget entities. There are additional
subcategories of use, that we have added in our ASTEC spreadsheet model and that reflects the form
of water supply (through gravity or mixed, gravity and pump systems) and the availability of sewage
network and the treatment of the wastewaters.
The company is entirely owned by the state through the Ministry of Regional Development and Public
Works. If the management decides to set a new price for its services it has to justify its decision for the
Ministry. From this year (2004) there will be a special governmental commission that will handle
specifically that issue. In 1999 the existing "Methodology for setting the water prices" was abandoned,
and the way tariffs were set was liberalized. Till the implementation of the Law for Regulating the
Water Supply and Sewage Services, a temporary methodology concerning all new tariffs and charges
will be developed. As already mentioned in the National Profile, the existing way for that procedure is
that all water supply and sewage companies that are of limited liability type should defend their
proposals for price changes of their services in front of the Ministry of Regional Development and
Public Works.
In most (or all) cases, however, the cost for future investments is not included in the calculations.
Which means that the investment has to be done from the sales of services revenue. To continue
further, the management of the WSSCs in Bulgaria work deliberately with lower net revenue margins
than the allowed 12% above the production and operating expenses. That may have resulted in
sacrifice of service quality and further increase in investment needs for network repair and
replacement purposes.
2.2.3 Water and Wastewater Tariffs
The water tariff depends entirely on the technology and costs of water extraction and delivery -
pumps, gravity or mixed and on the electricity and other costs incurred by the company. However, if
we look at the ratio of the "gravity water" to the total amount supplied, we will see that it is between 1-
2%. The total amount of produced drinking water for 2002 was 30,551,000 cubic meters (m3). From it
17,743,000 m3 was extracted through pumps, 12,372,000 m3 was bought (imported) and just 436,000
m3 came through gravity supply. For that reason and to avoid further complication with increasing the
number of service users categories we have neglected the gravity category in our ASTEC
spreadsheets.
The sewage tariff is calculated on the same basis as the water supply one. On the basis of all costs that
are relevant to the provision of the service. The company splits its wastewater charge in two parts: for
taking the water away to the main city collector plus a charge for water treatment when there is a
wastewater treatment plant (WWTP). Service users do not have to pay for treatment if their WW is
released without treatment. It should be noted that all industrial companies are obliged to have their
own WWTP on the territory of the enterprise. The treatment there is till some limits prescribed by the
Ministry of Environment and Waters and then there is additional treatment in the city WWTPs to the
extent that allows wastewaters to enter into the accepting water basin.
It should be noted that instead of single wastewater tariff, Pleven WSSC (and all the rest WSSCs in
Bulgaria) uses tariff differentials to charge for its wastewater services. In 2001 for example, the
households had to pay BGN 0.07 per cubic meter while the other consumers (mainly industry) had
three different tariffs based on the BOD5 levels per litre. When the BOD5 content was up to 200 mg/l
the price of sewage collection and treatment was BGN 0.40 leva/m3 (without VAT). For levels
Prepared by Dimitar Tropchev
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UNDP/GEF Danube Regional Project
between 200 and 600 mg/l the tariff was BGN 0.49 leva/m3. For levels above 600 (up to 1000) the
service users had to pay BGN 0.58 leva/m3. If that last limit (III Category) is surpassed then a 25%
increase above the last tariff is calculated.
Besides BOD5 other indicators are also monitored. Some of them are the content of suspended solids,
pH, fats and oil product with certain characteristics. Three degrees of contamination exist based on
levels of the above indicators and the tariffs are the same as set for the BOD5 example. When different
degrees for each of the indicators have been measured, the pricing is based on the highest degree for
all the effluent released into the system by the service user. In the region some of the companies with
III Category of discharged wastewaters are the brewery "Kamenitza" AD, "Gamza 1992" AD (wine
producer), couple of meat processing factories, the local heating company, etc.
In addition, when the limits set are surpassed, the MoEW or the Regional Inspection for Environment
Protection (RIOS) levies certain fines and sanctions on the polluter. The income from those fines is
split as follows: 70-80% for the state budget, 20-30% for the MoEW and 10% for the municipality on
which territory the industrial plant is located. The fines are usually imposed on companies that use
chemicals and other polluting substances in the production process such as oil refinery, textile, meat
processing and others.
2.2.4 Recent
Developments
World Bank Loan: There is a recent investment of about USD 1.7 mln undertaken by Pleven RWSSC.
This investment has been for rehabilitation of the water supply network. It was financed by 30 %
governmental contribution (15% granted by the Ministry of Regional Development and Public Works
and 15% provided by the water company) and the balance through a 10-year load of USD 1.4 mln loan
from the World Bank to the government of Bulgaria but earmarked for the Pleven RWSSC. The loan
has to be repaid in the year 2012. The loan is guaranteed by the state and it is part of the 1995 Loan
Agreement (for USD 45 mln) between the Bulgarian government and EBRD-World Bank. The
company has to repay it from July 2002, on semi-annual instalments with interest calculated based on
the Basic Central Bank interest rate (OLP5) plus three percent (3%). The management of Pleven
RWSSC has estimated that the interest repayments alone will amount to approximately USD 100,000.
During the first three years of utilization the company enjoyed a grace period and no repayment had to
be made.
The funds were used in 1999, 2000 and 2001. Of the total of USD 1.4 mln, USD 597,000 were used
for purchase and delivery of water-meters, stop and pressure valves, leak detection equipment and
more than USD 36,000 were for technical and project assistance and supervision. The rest of the funds
were intended to repair and replacement of the water supply network. The aim of the management was
to reduce leakage by tightening the control and measurement accuracy of the water produced and
water billed to consumers. As we saw it has been very successful: Table 1 shows sharp declines
leakage. The same table also shows that, even with sharply declining consumption, leakage as a
percentage of produced and imported water dropped from 58% in 1997 to 52% in 2001.
Table 2
Recent Investment by Sources and Use of Funds
Funds Provider
In million USD
Use of WB Loan
In million USD
World Bank Loan
1.40
Equipment (Leakage)
0.60
Government 0.15
Technical
Assistance
0.05
Pleven RWSSC
0.15
Water supply network, etc.
1.05
5 OLP moves close to 2.5% for the first ninth months of 2003, source Bulgarian National Bank.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 15
Decreased tariff levels: Another recent change as of May 2003 is that Pleven RWSSC lowered the
water tariffs from BGN 0.98 leva/m3 to BGN 0.93 leva/m3 for all service users. The change was due to
the negative impact of the price increase between 2001 and 2002 (29%) on the volume of sales given
the low income levels and economic activity in the region. The drinkable water consumption dropped
from 133 l/i/d (litres per inhabitant per day) in 1991 to 93 l/i/d in 2002. Besides the population in the
region decreased from 358,355 to 311,985 for the same period. The decrease in tariffs was also aiming
to eliminate an existing discrepancy between the estimated level of costs, the volume of sales and the
unit production cost.6
2.3 The Place of Pleven RWSSC in the National System
In this section we will try to compare Pleven RWSSC with the rest of the sector in Bulgaria by taking
into account several indicators and the figures for the total sector and industry averages. Below is a
short summary table (Table 3) with our findings. The data is one year later than the one used in the
previous section analysis so we can also add more recent trends for the company development.
Having in mind that there are 29 such companies, we can say that Pleven RWSSC is above average in
size. It serves 4% of the population but accounts for 6.5% of the "net revenues" from the sector. Also
shown by the high margin ratio 2.143% compared to 1.52%. What is worth mentioning is the
collection efficiency ratio, which in our case is 84% versus national average of 79%. So despite of the
increase in receivable, Pleven RWSSC is among the companies with high collection efficiency when
compared to the rest of the country. The level of the tariffs is close to the average but the charges for
sewage are higher. One of the reasons is that in Pleven region there is high concentration of water
polluting industries (brewery, chemical and food industries, etc.). Another finding is the relatively
high number of employees (7.7% from the total in the sector) as compared to the percentage of
population served (4.02%). While this could be a result of the complexity of operations of Pleven
WSSC, it could be also a potential organizational issue that is worth attention.
6 Source: Pleven RWSSC - "Explanatory note for change of the drinkable water tariff for settlements with mixed
water supply as of May 1, 2003".
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Table 3
Pleven vs. the Average of the Bulgarian Water Service Sector (year 2002).
Indicator
For the country
For RWSSC Pleven
As a %
Population served
7.845 mln
0.315 mln
4.02%
Revenue from activity
242 mln BGN
15.164 mln BGN
6.27%
Costs
238.4 mln BGN
14.839 mln BGN
6.22%
Accounting net revenue
margin
3.638 mln BGN
0.235 mln BGN
6.46%
Net revenue margin (%)
1.52
2.143
141%
Fixed assets
396.537 mln BGN
25.641 mln BGN
6.94%
Annual depreciation
31.238 mln BGN
1.193 mln BGN
3.82%
Investment in mln BGN
23.244 (74% of amort.)
1.081 (91% of amort.)
4.65%
Average water loss
49.06 %
50.82%
Water produced
797 mln m3 30.2
mln
m3 3.79%
Water billed
406 mln m3 14.9
mln
m3 3.67%
Water Tariff (no VAT)
1.41 to 0.50 BGN/ m3 0.98
BGN/m3
Sewage before treatment
0.04 BGN/ m3 0.07
BGN/m3 175.00%
Sewage + treatment
0.38 BGN/ m3
0.07 up to 0.69 BGN/m3
Receivables total
72.543 mln BGN
3.234 mln BGN
4.46%
Receivable HH
41.040 mln BGN 2.253
mln BGN
5.49%
Receivables budget ent.
15.851 mln BGN
0.929 mln BGN
5.86%
Receivables other
15.652 mln BGN
0.013 mln BGN
0.08%
Collection efficiency 79%
84%
106.33%
Debts
56 mln BGN
2.117 mln BGN
3.78%
Debts electricity
19 mln BGN
0.669 mln BGN
0.35%
Number of employees
13,551
1,044
7.70%
Average salary
325 BGN/month
324 BGN/month
Source: MRDPW.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 17
3 Issues and Challenges
If we take into account the overall situation in the water service sector in Bulgaria, Pleven despite its
problems could be classified among the better-performing entities in the country. It has relatively high
net revenue and collection efficiency and a bank loan to support its short-term investment. The new
regulations for tariff setting gives certain freedom in the management hands to justify a tariff increase
based on proved operational costs. Despite that freedom and the above average net revenue margin,
Pleven RWSSC is not able to self-finance the required long or even medium-term investment. There
are also ways to additionally reduce the water losses and collect the receivables outstanding. The
current data and mechanism for calculating and setting tariffs do not allow for proper allocation of
costs among users thus cross-subsidizing could possibly emerge. These and similar issues will be
addressed in the sections to follow.
3.1 Water Losses and Investment Needs
The high amounts of water losses for the Bulgarian water service companies in general are due to
several reasons. The surpassed depreciation dates of the water supply network (built in the '60 and
`70s of the last century), the low quality of the materials used in its construction, the imprecise
measurements during the planning and implementation process and the inefficient use and
maintenance during the years. That reasoning is also valid for Pleven WSSC. Despite of the significant
improvements made after the World Bank loan utilization the water losses are still high.
Expert's opinion about how to address this issue in Bulgaria can be summarized in the following
objectives:
· Replacement of the old water supply network that would result in reduced leakage;
· Installing pressure regulators in the high pressure zones;
· Cutting of the illegal connections to the network, laying fines and prosecuting the responsible
for those actions;
· Limiting the use of drinkable water for agricultural needs;
· Actions related to the modernization of the existing water metering system and equipment.
All those actions could be part of a strategy that has a goal to keep the company running at its present
state with efficiency enhancements from operational and financial points of view. However, they tell
us little about how the replacement of the old network will be financed or where the modernization of
equipment will come from. There is obviously the need for a long-term scenario how to solve this
problem. Before jumping into conclusions, there are several factors that need consideration.
First, we should bear in mind that large difference between the amount of water entering water supply
system and water consumption reflects not only leakage. It is also due to the fact that no reliable
methodology and equipment exists for measuring water before distribution, e.g. for surface water the
measurement is based on depth of water, and for ground water on capacity of the pumps. There are
no water meters for water mains. In addition, because of lack of appropriate control of water
distribution, part of water is distributed to unknown users and is not covered by consumption statistics.
Second, to address the problem of leakage needs not only strategic vision on the part of the
management for overall control and supervision of the network coupled with prompt reaction in
emergency cases (bursts) but also significant investments for improvement and replacement in certain
cases of the existing system of water supply and sewage. The government or local banks could not
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UNDP/GEF Danube Regional Project
always and forever provide these funds since the financial conditions of the company (Pleven RWSSC
and others) do not allow for repayment of significant amounts of loans. Other alternatives such as
concession and privatization may have to be considered. These options will be discussed in a later
section.
When looking at Table 3 or other statistical data from the water service sector in Bulgaria, one of the
first things that draw our attention is the low net revenue margin of these companies. Although by law
water companies could operate with net revenue margin between 12% and 30%, none of them have
even achieved 12%. It appears that net revenues are deliberately kept low because price of water is a
political and social issue with high sensitivity in Bulgaria. In the past (20 years ago) the tariffs
comprised a negligible amount of the average household income, which resulted in over-consumption
and use of drinkable water for irrigation and other side purposes. That totally discouraged savings and
efficient use of water. Today already the portion of income each family spends on water and energy
consumption is higher and though the levels of consumption had decreased the general population still
does not regard water as a commodity that has to be used wisely.
3.2 Collection of Receivables Outstanding
Table 3 gives us year 2002 data of uncollected bills for Pleven RWSSC. The total amount of
receivables outstanding is BGN 3.2 mln. From this, BGN 2.3 mln belong to households and industry
and BGN 0.9 to budget entities. By the middle of 2003, the picture is the following: BGN 3 mln are
due by households and BGN 1.5 mln by public entities. The biggest unpaid bill is that of the local
hospital, BGN 0.44 mln. The company had started 300 court procedures against the debtors.7
Table 4
Collection Efficiency
Service Information
1996
1997
1998
1999
2000
2001
2002
Receivables ('000 USD)
595 543 654 972 1,228
1,338
1,617
Revenue ('000 USD)
3,161 4,870 7,683 8,271
7,359 7,249
7,582
Receivables/Revenue
19% 11% 9% 12%
17% 18% 21%
Number of months due
2.3 1.3 1 1.4 2 2.2 -
Collection efficiency
82% 90% 92% 90%
88% 85% 84%
Using Table 1 and Table 3, we can extract the data for receivables and revenue of Pleven RWSSC
over time. Their proportion is growing over time from 9% in 1998 to 21% in 2001. We have to keep in
mind, however, that the payment of those bills is not permanently avoided but rather postponed in
time. The collection period can vary from 1-2 months to a year and more. However, we cannot say
how much of this debt will be "written off" as not collectable. So far the company cannot disconnect a
user from the system because of unpaid bills. That is why the debts are kept accumulating and the only
steps the management of Pleven RWSSC could undertake is to start a legal procedure in order to settle
that payments. There was a case cited in the same 24 Hours newspaper article (Aug.14, 2003, p.9)
about a household user who had not paid his bills since 1998 and had accumulated more than BGN
2,000 debt to the water company. What the companies are doing in such cases besides trying to solve
the issue through court is to reschedule payments and establish a somewhat mutual acceptable scheme
(timetable) for settling the debt when this is possible of course.
7 Published in "24 Hours" newspaper, p.9, Aug.14, 2003: "100,000 people are two days without water because of
dam repairs in the middle of the summer" (the title of the article does not refer to Pleven RWSSC case).
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 19
3.3 Tariff Calculations Do Not Reflect the Economic Cost of Capital
As discussed in previous section the methodology for tariff calculations of the water supply and
sewage services does not only suffer from social policy implications but is inefficient in the sense that
it does not capture the true costs of capital involved in the process of water extraction and delivery to
the final consumers. Besides the usual cost items as Materials, Energy and Fuels, Personnel, Financial
and other expenses there is also the item Depreciation, which should reflect the replacement coat of
fixed assets. However, due to many reasons (accounting, economic, management) it is not the case.
Having in mind that in Bulgaria most of the infrastructure was built 30-40 years ago and not properly
maintained, we could easily imagine that the life of the significant part of the present equipment and
network should be over by now. As a result the depreciation figure might not reflect the real situation
of the fixed assets of the company and in many cases it is worse than it appears on the balance sheet of
the company. In addition, new investment requirements, water losses above 25% and uncollected
receivables are not included in current tariff calculations. Moreover, the cost allocation estimates are
assessed against water billed to consumers not total amount of produced water. In the scenarios
development process we have tried to suggest alternative ways how Pleven RWSSC could include
most of these costs in the tariff setting. Our task is to assess what would be the impact on the service
prices and overall situation of the company in regard to consumption levels, operational and financial
performance indicators. The issue of accurate costs estimation and allocation among users will be an
important factor of consideration when future reform proposals are considered.
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UNDP/GEF Danube Regional Project
4 Scenarios
Settings
4.1 Scenarios Description and Summary
The following is a short description of each scenario we will address in this study:
Baseline:
Baseline 1A: scenario using current tariffs and charges, average investment figure for three
consecutive years (1999-2001) including the WB loan; costs of non-payers are not covered; no
cost recovery, no marginal cost pricing.
Baseline 1B: full cost recovery scenario with average investment; costs of non-payers are not
covered; single commodity charge, no marginal cost pricing.
Sustainable:
Sustain 2A: same as Baseline 1B plus BGN 3.5 mln additional investments (60/40 to DW and
WW) estimated to fully replace the system on an on-going basis (which means leakage at 22%
of production); single commodity charge. Payment enforcement strategy at the cost of 15% of
original non-payment, 20% improved payment for budget entities, 50% improvement for all
others. Remaining non-payment covered by payers.
Long-term:
Upgrade 3A: same as Sustain 2A plus restructuring of household service users categories, as
there is increased WW network collection and treatment. New WW network (financed by
grant) and WWTP (financed by loan) investments, and related increase of fixed and variable
costs.
Scenario descriptions are summarized below in Table 5. As one can notice through the gradual new
investments we have tried to improve the operational developments in order to address the existing
problems of the company. Leakage reduction, collection of receivables, increase in wastewaters
treatment efficiency and others are weighted through the cost-revenue analysis and calculations of the
spreadsheet model. Particular attention is placed on the tariff changes as we expect that they would be
affected most by the proposed scenarios. Besides it was the intention to suggest a better way of tariff
estimation that would include greater part of the costs incurred by Pleven RWSSC in the process of
providing its services.
Of course the main objective remains to assess how these developments and results would affect
Pleven RWSSC and the quality of its service. By comparing the current situation to the one that could
provide sustainable steady state, we ask what the level of the new tariffs has to be in order to generate
enough revenues that offset the additional investment needs to attain that sustainability. The upgrade
steady state further explores that question by adding a proposed investment for increased wastewaters
treatment and pollution reduction of the effluent. Last but not the least, our objectives would be
without much consequence if we do not estimate what would be the additional burden of all those
scenarios for households service users as the most vulnerable category.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 21
Table 5
Main Features of the Scenarios
Name Baseline 1A Baseline 1B
Sustain 2A
Upgrade 3A
Scenario
Description
Cost recovery
No
Yes
Yes
Yes
Marginal cost pricing
No
No
No
No
Cost of non payers covered
No
No
Yes
Yes
Yes (transfer
New connections or change in SU
No No No
of HH accounts
accounts distribution
to WW with
treatment cat.)
Investment into the WWTP
No
No
No
Yes
Improved collection of receivables
No
No
Yes
Yes
Leakage reduction
No
No
Yes (30%)
Yes (30%)
Before presenting the findings we would like to make some clarifications regarding the scenario
settings and the abbreviations we have used in the tables. First, we have divided the service users of
RWSSC Pleven SPLTD into the following categories:
- Household A1 or also referred to as "Households (WSc-SNT)" are households users
(HHs) with water supply and sewage delivered as composite goods (sewage is 80% of the
water consumed) and without treatment of wastewaters;
- Households A2 or also referred to as "Households (WSc-ST)" are those HHs are just the
same as the above category but they have sewage treatment added;
- Households B or Households (W) are HHs with only water supply and no sewage at all;
- Budget entities (WSc-SNT) are the budget service users who have both water supply and
sewage (not treated) as composite good (sewage is 90% of the water consumption);
- Budget entities (W) are those budget entities that receive only water from Pleven RWSSC;
- Industry and agriculture (SNT) refers to the industrial companies with non-treated sewage;
- Industry and agriculture (ST) are the industrial users that have sewage treatment as well;
- Industry and agriculture (W) are the industrial users that have access to the water supply
network.
Initially separate scenarios treating marginal cost pricing options were developed. Finding from some
of them will be presented in a separate appendix. In general those scenarios seem to encourage
consumption for most SU categories and as a result lead to slightly higher negative net revenue results
for Pleven RWSSC. If the company considers that increased consumption could in other ways be
beneficial effects, then the use of two-part tariff could be again reconsidered. Also scenarios that were
simply a variation of each other with costs of non-payers covered for example in one of them, we have
decided to exclude the one that does not have significant influence on the analysis and the specific
objectives we have set.
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UNDP/GEF Danube Regional Project
Another note concerns the interpretation of the balance of accounts results. Please have in mind that
this figure includes the receivables that were not collected by the company. So in case when we have a
negative net results but we have asked the model to calculate cost recovery, the negative figure is the
amount due by service users plus minus the precision error (1%). As mentioned earlier, the major
criteria for evaluation of the various scenarios will be their impact on the tariffs paid by service users
and the balance of accounts of Pleven RWSSC as well as on the potential environmental benefits or
losses. We would be also looking at the change in consumption levels as well but in general the higher
the tariff the lower the consumption will be.
The main issue of concern when developing our ASTEC scenarios will be the effect of different
investment and system changes on tariff levels. Tariffs, net revenues, consumption (discharge in the
case of wastewater) will be the exogenous (unknown) variables, which we want to optimise. While
various costs, discount rate, elasticity of demand, value added tax rates and other input data will be our
given or endogenous variables.8 While most of the data were available from company reports,
statistical institutes and financial organizations, the elasticity of demand figure is based on rough
estimates due to the problems with metering, water losses and other factors that affect the precision of
calculations.9
As a last point before going into the scenario description section, it is probably worth mentioning that
the wastewater treatment plant of the town of Pleven was designed during the period 1975 1986 and
was put into exploitation in 1990. The regime of present operations corresponds to the low magnitude
of the loads of the main purification equipment along the way of the water and the sludge. The WWTP
is running at less than half of its capacity (in comparison to the designed parameters). That is why no
expansion of the already existing capacities is expected. It is necessary, however, that the equipment
of the aeration system be replaced in order to achieve greater effectiveness of the activated sludge
tanks. That coupled with the need for replacement and expansion of the existing sewage network
determines the investment requirements and the setting for our upgrade scenario.
8 For more elaborations on the ASTEC model methodology and detail description of input and output data see
"Appendix 1 The ASTEC Model Users Guide" in Volume 1: Executive Summary and Overview of Tariff and
Charge Reform Issues and Proposals.
9 Nevertheless, the 20% elasticity of demand used is a relatively reliable estimate for the most recent years with
available data (2001-2002). The 6% decline in average daily consumption (from 99 l/i/d to 93 l/i/d), correspond
to the 29% (from BGN 0.75 to BGN 0.98) water tariff increase for the same period (Source: Pleven RWSSC
reports).
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria
23
4.2 Scenarios
Results
The calculations are based on company and World Bank reports for the year 2001 since that was the year with the most complete and accurate
data available.
Table 6
Water and Wastewater Service Tariffs (in BGN)
Water
Wastewater
Number
Baseline
Baseline
Sustain
Upgrade
Baseline
Baseline
Sustain
Upgrade
Service user category
of
1A
1B
2A
3A
1A
1B
2A
3A
Accounts
Households A1 (WSc-SNT)
13,669
0.75
0.73
0.80
0.81
0.07
0.10
0.20
0.33
Households A2 (WSc-ST)
54,012
0.75
0.73
0.77
0.78
0.12
0.13
0.28
0.39
Households B (W)
73,973
0.75
0.73
0.79
0.80
Budget entities A (WSc-SNT)
261
0.76
0.73
0.79
0.80
0.07
0.08
0.20
0.33
Budget entities B (W)
673
0.76
0.73
0.81
0.82
Industry and agriculture A1 (SNT)
628
0.07
0.08
0.20
0.33
Industry and agriculture A2 (ST)
4,013
0.52
0.23
0.38
0.41
Industry and agriculture B (W)
6,912
0.76
0.73
0.80
0.81
Total:
154,141
Prepared by Dimitar Tropchev
24
UNDP/GEF Danube Regional Project
Table 7
Separate Balance of Accounts (in BGN) for Water and Wastewater Services
Water
Wastewater
Number
Baseline
Baseline
Sustain
Upgrade
Baseline
Baseline
Sustain
Upgrade
Service user category
of
1A
1B
2A
3A
1A
1B
2A
3A
Accounts
Households A1 (WSc-SNT)
13,669
-65,540
-80,235
-35
44
-47,780
-8,769
-37
69
Households A2 (WSc-ST)
54,012
-96,475
-159,263
-572
457
-334,234
-23,347
-217
465
Households B (W)
73,973
-265,664
-349,317
313
-286
0
0
0
0
Budget entities A (WSc-SNT)
261
-40,701
-117,248
-84
166
-151,940
-11,755
-118
262
Budget entities B (W)
673
-91,815
-152,269
230
-198
0
0
0
0
Industry and agriculture A1 (SNT)
628
0
0
0
0
-19,750
-2,624
247
-526
Industry and agriculture A2 (ST)
4,013
0
0
0
0 1,397,368
-152,119
137
-305
Industry and agriculture B (W)
6,912
-62,438
-90,684
104
-93
0
0
0
0
Total:
154,141
-622,634
-949,017
-44
90
843,664
-198,615
11
-35
Figure 5
Water Service Revenues and Unpaid Tariffs per Scenario
Figure 6
Water Service Costs Breakdown per Scenario
Water Service Annual Revenue and Unpaid Bills (in BGN/year)
Water Service Annual Costs per Scenario (in BGN)
16,000,000
16,000,000
14,000,000
14,000,000
12,000,000
12,000,000
10,000,000
10,000,000
8,000,000
8,000,000
6,000,000
6,000,000
4,000,000
4,000,000
2,000,000
2,000,000
0
0
Baseline 1A
Baseline 1B
Sustain 2A
Upgrade 3A
Baseline 1A
Baseline 1B
Sustain 2A
Upgrade 3A
Total revenue
Unpaid tariffs
Annualized Investment Costs
Operating Costs
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria
25
Figure 7
Wastewater Service Revenues and Unpaid Tariffs per Scenario
Figure 8
Water Service Costs Breakdown per Scenario
Wastewater Service Annual Revenue and Unpaid Bills per Scenario
Wasterwater Service Annual Costs per Scenario (in BGN/year)
(in BGN/year)
7,000,000
7,000,000
6,000,000
6,000,000
5,000,000
5,000,000
4,000,000
4,000,000
3,000,000
3,000,000
2,000,000
2,000,000
1,000,000
1,000,000
0
Baseline 1A
Baseline 1B
Sustain 2A
Upgrade 3A
0
Baseline 1A
Baseline 1B
Sustain 2A
Upgrade 3A
Total Revenue
Unpaid Bills
Annualized investment costs
Operating costs
Table 8
Balance of Accounts for Water and Wastewater Services Together (in BGN)
Baseline
Baseline
Sustain
Upgrade
Service user category
Number of
Accounts10
1A
1B
2A
3A
Households A1 (WSc-SNT)
13,669
-113,321
-89,004
-73
113
Households A2 (WSc-ST)
54,012
-430,709
-182,610
-789
922
Households B (W)
73,973
-265,664
-349,317
313
-286
Budget entities A (WSc-SNT)
261
-192,642
-129,003
-202
428
Budget entities B (W)
673
-91,815
-152,269
230
-198
Industry and agriculture A1 (SNT)
628
-19,750
-2,624
247
-526
Industry and agriculture A2 (ST)
4,013
1,397,368
-152,119
137
-305
Industry and agriculture B (W)
6,912
-62,438
-90,684
104
-93
Total:
154,141
221,030
-1,147,631
-32
55
10 The distribution of service user accounts for the Upgrade 3A scenario is different but the total number remains unchanged.
Prepared by Dimitar Tropchev
26
UNDP/GEF Danube Regional Project
Table 9
Total Water Consumption and Wastewater Discharge by Category of Service Users (in cubic meters per year)
Water
Wastewater
Baseline
Baseline
Sustain
Upgrade
Baseline
Baseline
Sustain
Upgrade
Service user category
Number of
Accounts10
1A
1B
2A
3A
1A
1B
2A
3A
Households A1 (WSc-SNT)
13,669
1,096,673
1,094,992
1,058,376
931,499
877,339
875,994
846,701
745,199
Households A2 (WSc-ST)
54,012
4,333,421
4,339,955
4,192,936
5,909,227
3,466,737
3,471,964
3,354,349
4,727,382
Households B (W)
73,973
5,934,906
5,963,091
5,874,373
4,098,462
0
0
0
0
Budget entities A (WSc-SNT)
261
3,189,000
3,202,857
3,088,385
3,014,899
2,870,100
2,882,571
2,779,547
2,713,409
Budget entities B (W)
673
2,581,755
2,600,870
2,549,204
2,543,348
0
0
0
0
Industry and agriculture A1 (SNT)
628
0
0
0
0
349,926
336,984
267,766
237,654
Industry and agriculture A2 (ST)
4,013
0
0
0
0
5,445,000
6,682,728
5,881,323
5,779,594
Industry and agriculture B (W)
6,912
1,230,000
1,239,103
1,217,394
1,214,602
0
0
0
0
Leakage
17,388,000
17,388,000
4,563,000
4,563,000
0
0
0
0
Total:
154,141
35,753,755
35,828,868
22,543,669 22,275,038
13,009,102
14,250,241
13,129,686
14,203,238
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 27
5 Scenario Findings and Conclusions
After presenting some detailed output of the spreadsheet model calculations we will try describe
interpret these results. Several observations should be already obvious. First, it is clear that using the
present (year 2001) levels of tariffs, Pleven RWSSC is not able to generate sufficient revenues that
would enable the company to cover its costs and save enough reserves for necessary investment
projects (Table 8). Moreover with water losses at almost 50% of the total consumption and the
uncollected bills (BGN 1.3 mln) suggest that the positive BGN 0.22 mln balance would quickly turn
into a loss once these costs are accounted for. That is what our Baseline 1B scenario shows.
Second basic finding is that even when we raised levels of investment to reduce leakage and improve
receivables collection in the Sustain 2A scenario, Pleven RWSSC ended up with enough revenue to
nearly offset the investment needs (Table 8). Though significant investments were made, it seems that
tariffs did not rise substantially. The topic will be further discussed in the next chapter where burden
estimates will be analysed. For now let us note that while tariffs for water remained close to the
original (Figure 9) those for wastewater went up for households, budget entities and industrial users
with sewage without treatment. On the other hand the service prices for industrial users with treated
sewage decreased even in the upgrade scenario. The overall results reflect the cost savings associated
with water production and less leakage associated with increase in capital investment.
Figure 9
Water Service Tariff Developments per Service User Category and Scenario
Wa te r T a riffs p e r S e rv ic e Us e r a n d S c e n a rio
(in B G N/c u b ic m e te r)
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
House holds
House holds
House holds
Budge t
Budge t
Industry a nd
A1
A2
B
e ntitie s A
e ntitie s B
a griculture B
Ba se line 1A
Ba se line 1B
S usta in 2A
Upgra de 3A
Third, the impact on tariffs of possible costs changes and investment strategies were the main target
for scenario development. We wanted to find out the minimum service prices that would be sufficient
to cover all costs and avoidance of payment in order to secure the sustainable and later upgraded
operations of Pleven RWSSC. As a result there is no substantial net revenue in any scenario. The
small revenue from the first one turned into loss when cost recovery was performed and the unpaid
bills were added into the calculations. In fact all scenarios but the first two include full cost recovery
in the calculations. In addition, the break-even results in the sustainable and upgrade developments
reflect the precision of estimation and the fact that we have specified costs of non-payers to be covered
by the model. If the company would like to gather additional reserves besides the investment projects
specified in the spreadsheet scenarios then it could possibly start by making the necessary calculations
and estimating the new level of tariffs required to finance that reserves.
Prepared by Dimitar Tropchev
28
UNDP/GEF Danube Regional Project
Figure 10 Wastewater Tariff Developments per Service User and Scenario
Wastewater Tariffs per Service User and Scenario
(in BGN/cubic meter)
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Households A1
Households A2 Budget entities A
Industry and
Industry and
agriculture A1
agriculture A2
Baseline 1A
Baseline 1B
Sustain 2A
Upgrade 3A
As seen from the figure above (Figure 10), there are substantial changes in the wastewater service
prices due to new investments and cost allocation among service users. Initially we assumed that the
higher tariffs industrial users with sewage treatment have to pay was due to the much higher level of
pollution and associated treatment. However, cross subsidizing should not be excluded from the
picture. The difficulty to conclude that there is such, stems from the fact that we do not have enough
information how separate cost items should be allocate in order to reflect the real costs of providing
the service to different users. The task would be quite non trivial though having in mind the scope of
the service (regional company) and complexity of network. Despite of that obstacle we had enough
information that allowed us to differentiate costs among service users with treated wastewater service
and those without. How that affected the overall company operations and financial performance will
be elaborated upon in the sections to follow.
5.1 Basic Scenarios (Baseline 1A and Baseline 1B)
5.1.1 Replicating the Original Company Data for 2001
The recent developments captured in the first scenario include the present state of the company
operations or in other words, scenarios where no reforms or changes to improve the present condition
beyond the current WB and internally financed investments are done. Our goal was to establish a
baseline so that we know where Pleven RWSSC really stands in terms of current budget balance given
the current costs and tariffs. We can see the difference when comparing them with the cost recovery
scenario where the tariffs are set in a way to cover the "full costs"11 of operation.
11 "Full Cost recovery" in this case takes into account all costs that we have included in the model. However,
there might be some costs that are left aside. For that reason we cannot speak about "full cost recovery" in the
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 29
Nevertheless, Baseline 1A scenario captures adequately the net balance for both water and wastewater
services and reports a figure of BGN 0.22 mln that is close to the actual we have for 2001 of BGN
0.23 mln. In this initial model my goal was to see whether the actual financial statements of the
company could be replicated by using our spreadsheet model. Since original tariffs are used and we
have not asked for full cost recovery we cannot say anything about the sustainability or efficiency of
the system. Besides neither water losses nor collection of receivables issues could be brought to
discussion yet. The end result is that we have not only realistic revenue and cost estimates but such
that allow the separation of financial and operational results among users and type of service (water
and wastewater).
5.1.2 Introducing Cost Recovery
More interesting changes occur when in the next, Baseline 1B scenario we have asked the model to
calculate full cost recovery. First, the net revenue turned into loss of BGN 1.1 mln (Table 8). As
mentioned before, the difference represents the avoided tariff payments not reflected in the P&L
account of the company. Besides, in order to reflect the actual cost of replacement of the old
equipment and the utilization of the funds associated with the World Bank loan agreement, we have
used the average investment instead of the annual amortization figure.
The tariff levels for water went down with 3% (from BGN 0.75 to BGN 0.73) for households (HH)
and 4% (from BGN 0.76 to BGN 0.73) for budget entities (BE) and industry (Figure 9 and Table 6).
At the same time, tariffs for wastewater without treatment increased with 43% (from BGN 0.07 to
BGN 0.10) for HH and remain almost the same (BGN 0.08 from BGN 0.07) for BE and industry. The
last is also true for the price of sewage with treatment service for HH (BGN 0.13 from BGN 0.12)
while for the industrial and agricultural users (I&A) with the same service it decreased with 56%
(from BGN 0.52 to BGN 0.23). While the latter finding could reflect the particular cost allocation in
ASTEC among users, it could also indicate the existence of cross subsidizing.
Cross subsidizing is an issue of policy consideration and it will be discussed in the reform proposal
section. For now it should be noted that the spreadsheet model allows the allocation of costs to be
distributed in various ways among SU categories and as a consequence we end up with different tariff
levels. Placing equal weight among users allows us to see the average tariff for the service. If there are
sufficient reasons (socially vulnerable groups, disproportional costs) for another way of cost
distribution then the management of the company could reflect that fact and find the appropriate
balance via the necessary adjustments in the spreadsheet model.
5.1.3 Baseline Developments Scenarios Summary
The aim of cost recovery scenarios is not to show that the company operates on a loss or to confirm its
positive net revenue. It attempts to answer the question: are the current tariffs really reflecting the cost
structure of the company12. It is also a rather simple way, in which management can quickly calculate
what is the lower tariff beyond which they would probably incur losses no matter how well the other
things are going. Cost recovery scenarios are especially efficient if we know the present value of our
fixed assets and have included all possible costs in our calculations. On the other hand this type of
scenarios does not differentiate between fixed and variable costs and they could not solve the problem
of cross subsidizing among service user categories.
However, what cost recovery could help us achieve is to eliminate some of the drawbacks of the
present methodology for setting tariffs. One example could be that we can include the cost of water
losses in our calculations. In the existing broadly used way for tariffs setting all cost items are
weighted based on the amount of water and wastewater billed to consumers. So the cost of leakage is
sense that all possible costs are included in the tariff calculations but rather that the tariffs are set in such a way
so that to cover all costs input in the model.
12 Since price setting in water sector in Bulgaria for such companies like Pleven RWWSC should be justified in
front of the Ministry of Regional Development and Public works based on all the cost incurred in the process of
providing the service.
Prepared by Dimitar Tropchev
30
UNDP/GEF Danube Regional Project
not taken into account. Only costs for water losses not more than 25% are allowed to enter the tariff
calculations under "Material Expenditure" according to the Water Law, Article 193 (3) from July
2002.
5.2 Sustainable
Scenario
The sustainability of Pleven RWSSC operations will require the resolution of the issues emphasized in
the previous chapters. It should be clear that with the present level of uncollected bills and the current
water losses any investment that ignores these two areas could not significantly improve the
operational and financial efficiency of the company. That is why before going into issues related to
water pollution reduction and toxic substances control we have targeted those two objectives in the
medium-term scenario section. There are several developments that we have taken into consideration
when dealing with leakage reduction and control of receivables outstanding. First, the amount of new
investment that will be required to undertake such steps in efficiency enhancement. Second the
possible effect on different costs items that will probably lead to the introduction of new costs. Third,
the effect on tariff levels when all incurred costs are to be covered.
5.2.1 Cost of Non-Payers are Covered
My cost recovery scenario would not be full if we have not asked the model to calculate cost of
payment avoidance. In order to do that we have tried to estimate how much the tariffs should rise in
order to cover the costs incurred by non-payers. That is why Sustain 3A scenario includes that
specification. The implication would be that instead of contributing to the loss in the net balance
figure, the cost of unpaid bills would increase tariffs. Since tariff levels and their setting are issues of
particular interest that would be a desirable outcome. Moreover given the initially set objectives we
would like to know what would be the implication of various cost structure on company net revenue
margin as well as on service prices.
Also in the present method used generally by the companies in the sector for tariff calculations no
consideration is given to the debt that is not collected by the company. Though the percentage of
receivables is growing every year it seems that there is no solution how that problem could be
incorporated into the tariffs setting calculations. To give a relative measure of that burden to the
system we have included that feature in Sustain 3A scenario where the costs of avoided payments are
borne by regular payers.
5.2.2 Improved Payments of Uncollected Receivables
There are also new operational developments that lead to lower water losses and level of receivables.
For example the scenario envisaged that as a consequence of management efforts and legal procedure
enforcement, the avoidance of payments has decrease with 20% for budget entities and 50% for all
other categories. This would come as a result from the increased quality of service, better
communication with users and strict attitude toward those who avoid payment or attempt to illegally
connect to the network. All these will find its reflection in increased cost for water service, as we
would expect. The cost of this reduction could be 15% of the total non-payments.
5.2.3 Water Losses Reduced to 22%
To improve the collection of payments is of great importance but the issue concerning leakage control
and reduction remains. Though cost recovery scenario could model and cover these amounts of water
losses, it is of no great benefit for anybody if Pleven RWSSC just raises tariffs to cover the loss and
does nothing to improve the situation. In the last five years of the period in question (1999-2001), the
management achieved significant progress in that sphere reducing the figure from 25 to 17 mln m3.
That improvement serves as a basis for the current scenario calculations regarding the new target of
22% we have set as part of the sustainable scenario.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 31
Assuming that BGN 1.2 mln were invested solely for the purpose of leakage reduction, we can
estimate that the necessary additional investment for meeting the 22% target should be around BGN
3.5 mln. That figure requires cautious treatment and the assistance of Pleven RWSSC is required in
order to come up with a more precise number that reflect all possible costs and reduction implications.
Moreover, we have to keep in mind that similar investments should take into account a proper cost-
benefit analysis and the targeted level of reduction should not lead up to a negative result when all
related expenses and potential benefits are summed up. In some cases the state of the network and
metering equipment would probably not allow us to decrease water losses below certain level.
In the additional scenarios we have run leakage was assigned per responsibility in percentage for each
type of service users (Appendix II). Due to the complexity of the network that has to reach every
subscriber, the fact that it is user's responsibility to maintain the pipes once they have entered his
property and not on the last place because of the higher number of illegal connections, we have created
number of scenarios where households are responsible for three times more leakage than the rest of the
categories. As a consequence HH users end up with higher tariffs for water services, which
discourages consumption and improves net revenue through decrease in uncollected receivables.
Even if such distribution of leakage responsibility would probably reflect the real situation it should
not serve as a final decision on the subject. The prime result we receive after such allocation is that the
tariff for households would go up and this is not always the objective or viable policy consideration
especially if there are strong reasons for conducting "social policy" in the region. Also the allocation
of water losses to the entities responsible for this could be non-trivial task.
5.2.4 Sustainable Scenario Summary Findings and Conclusions
The results from the sustainability scenario is that water service tariffs went up slightly (between 3%
and 7%) as compared with the original levels of Baseline 1A and reached levels of BGN 0.77 BGN
0.81 (from BGN 0.75 BGN 0.76). The new wastewater tariffs (BGN 0.20 to BGN 0.28) are more
than twice higher for all service users except industry when compared to the previous Baseline 1B
scenario (BGN 0.08 BGN 0.13). The results reflect the part of the new investment allocated under
WW. Again industrial users with treated WW have lower tariff (BGN 0.38) than original (BGN 0.52
in Baseline 1A) but higher with 65% when compared to the cost-recovery Baseline 1B. While it may
be true that Bulgaria has among the lowest wastewater service tariffs in the region, the proposed
increase especially for households should be analyzed by estimating the additional burden it would
place on the service users. That would be dealt with in the chapters to follow.
Figure 11 Amount of Receivables Outstanding for Water and Wastewater Service per
Scenario
Total Avoided Paym ents for Water and Wastew ater
Services per Scenario
BGN
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Base line 1A
Base line 1B
Sustain 2A
Upgrade 3A
Unpaid w astew ater
Unpaid w ater
Prepared by Dimitar Tropchev
32
UNDP/GEF Danube Regional Project
As seen from the figure above (Figure 11) the reduction of avoided payments is more than significant
in the sustainable scenario as compared to the initial data. The actual overall decrease is about 41%
(from BGN 1.29 mln to BGN 0.76 mln). When compared to the previous cost recovery scenario, the
Sustain 2A results of BGN 0.76 mln represent 34% decrease (from BGN 1.15 mln). The targeted
decrease in avoided payments (20% for budget entities and 50% for all other users) may seem rather
ambitious but given the good track record of the company in the past (1997, 1998, 1999) in collection
efficiency (90% and higher) it seems realistic and attainable.
To recapitulate, the sustainability scenario objectives could be met without significant increase in tariff
levels. Both parameters, leakage reduction and collection of outstanding debt due by service users
have improved significantly and that could be a substantial guarantee that the overall operation and
financial efficiency of the company is stabilized to levels that will allow the smooth and continued
provision of services. Moreover there would probably be sufficient time for Pleven RWSSC to build
enough reserve after the new investment (BGN 3.5 mln) is in place and the required financing for
maintenance and replacement of existing network decreases.
5.2.5 The Introduction of a Two-Part Tariff
Initially we have considered including in the study two-part tariff scenarios. The merit of the two-part
tariff is that economically it may be more efficient than a single, commodity charge tariff when a
system has excess capacity. such as in the case of Pleven RWSSC. However, fixed costs allocation is
arbitrary and only operating costs are treated as marginal cost. That is why the company could further
explore the allocation of fixed costs if it wants two-part tariff to protect certain, economically
vulnerable customers.
We decided not to include strict marginal cost pricing scenarios in our analysis for couple of reasons.
First, the results showed a clear tendency for overall increase in consumption. That deteriorated net
revenue figures because of the increase in variable costs and the avoided payments. No other
significant changes were identified. Second, the introduction of such a tariff would be new for
Bulgaria and it would probably require serious considerations on both planning and executive
(operational) level. Marginal cost pricing may not be beneficial for service users who have relatively
lower consumption levels in general if fixed costs are allocated equally to all customers. The reason is
that the fixed part of the tariff that covers fixed cost could be greater than their previous payment
levels (based on cubic meters consumed only) when no two-part tariff existed. Third, the estimation of
relative burden for two-part tariff scenarios is not so simple to compare with other scenarios where
marginal cost pricing (two-part tariffs) is not used.
5.3 Upgrade Scenario
We have called the forth scenario upgrade not only because it envisaged significant investment in
enhancement the efficiency of existing network and equipment. It is an upgrade in terms of service
provision as well, since we have tried to address issues after leakage reduction and improved
receivables collection are achieved. We have tried to capture features that lead to improvement of
toxic substance control and pollution reduction in the effluents. As direct results of the investment
projects assumed in our scenario there are additional service users with treated sewage and the
treatment itself is improved due to the increase efficiency of the WWTP. As one could see that
scenario is also a continuation from the previous set of scenarios and we have already assumed that the
objective from the medium term are met. This means that leakage is decreased to 22% of water
produced and imported, collection of receivables improved (20% for BE and 50% for the rest) and we
have invested BGN 3.5 mln for repair and maintenance that will achieve the targeted water loss levels.
The cost of non-payers is also covered.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 33
5.3.1 Improvement in Wastewater Network Collection and Treatment As Well As
Investment in the WWTP Efficiency and Modernization
Additional developments that we have targeted in the upgrade developments are the investment in
increase wastewater collection and treatment. If the objective is met there would be a transfer of
households' accounts 30% from households with water service only and 10% from HH with not
treated sewage to the sewage with treatment category. That is eventually achieved as a result of a
governmental grant financing (BGN 6 mln), which will come from the state effort to stabilize and
revitalize the sector.
In fact the Upgrade 3A scenario envisage the above mentioned developments to be part of a possible
ten years investment program of the company that will also include the repair and modernization of
the existing WWTP. For that last investment we have selected a tentative figure of around BGN 10
mln.13 Since most of the industry and big budget enterprises have their own treatment plants we would
expect the project as a whole and the improved capacity and quality efficiency of Pleven WWTP in
particular to handle primarily the domestic wastewater discharge problem and possible increase in the
level of standards (grades) set for industrial pollution.
Naturally as a consequence of the above new investment initiatives the cost structure for the
wastewater services will change as well for both fixed and variable costs. That is why we have added
besides the 10 mln BGN fixed investment and BGN 6 mln grant, one new variable costs for Pleven
RWSSC that attempt to capture the improved treatment requirement for the plant.
5.3.2 Scenario Summary Findings and Conclusions
After so many changes and new costs added one would expect that the net revenue of the company
would deteriorate significantly or if not that the tariffs and charges would become sky-high to
compensate for the expenses on the WWTP renovation. What we showed is that this is not the case.
The upgrade scenario is both possible and feasible. Due to model specifications of full cost recovery
scenarios, the more important changes happened at the tariffs level. The water tariffs remain virtually
unchanged (BGN 0.01 increase) since no new costs items were added to the system. Wastewater
tariffs increased as expected 65% for service users with sewage but no treatment and 3% to 40% for
those with treated wastewaters. The unequal changes are due to costs allocation specification in
ASTEC where we asked the model to distribute new investment equally among users. Similar scenario
with only different BGN 10 mln loan allocation, laying 70% weight on industry with treated sewage
and 30% on households with treated sewage produced tariffs closer to the original distribution. In that
Upgrade 3B case, Pleven RWSSC ended up with three times higher (than in Baseline A1) sewage
tariffs for all users except industry with treated wastewater. For those last users, the new tariff was still
below the original (BGN 0.49 as compared to BGN 0.52). All the other results remain as in Upgrade
3A.
Whether the new higher payments would represent a substantial burden for service users is a question
that deserves special attention particularly in the case of households as the most vulnerable to adverse
price changes category. The answer of this question will be a priority for the chapter to follow.
13 The actual investment needs figure for through rehabilitation of the systems is probably much higher.
However, we have tried to specify investment that is attainable through small adjustment of tariff levels and at
the same time have positive impact on Pleven RWSSC operations.
Prepared by Dimitar Tropchev
34
UNDP/GEF Danube Regional Project
Table 10
Annual Water Expenditure per Type of Service, User and Scenario (no VAT)
Water
Service
Wastewater
service
Baseline Baseline
Baseline Baseline Sustain Upgrade
Service user category
Sustain 2A Upgrade 3B
1A
1B
1A
1B
2A
3B
Households A1
60.17
58.67
61.96
62.15
4.49
6.39
12.58
14.54
Households A2
60.17
58.85
60.07
59.39
7.70
8.62
17.37
23.73
Households B
60.17
59.04
62.69
63.36
0.00
0.00
0.00
0.00
Budget entities A
9,285.98 8,988.14
9,300.70
9,311.43
769.76
894.70 2,130.88 2,460.88
Budget entities B
2,915.50 2,830.73
3,067.29
3,087.33
0.00
0.00
0.00
0.00
Industry and agriculture A1
0.00
0.00
0.00
0.00
39.00
43.67
87.05
96.34
Industry and agriculture A2
0.00
0.00
0.00
0.00
701.13
379.26
556.38
671.82
Industry and agriculture B
135.24
131.31
140.93
141.85
0.00
0.00
0.00
0.00
For now we would like to summarize that the proposed upgrade scenario developments though
significant and investment demanding seem not to have that highly unfavourable effect on tariff
structure for the majority of service users. On the other hand they target areas of improvement that
have lasting impact on Pleven RWSSC operational efficiency. Wastewater collection and treatment is
upgraded in both capacity and efficiency of treatment that will have major effect on water pollution
and toxic reduction. At the end we have more sewage that has been treated and more service users
who are connected to it. Neither consumption levels nor payment collections are negatively affected.
As noted before, the last, upgrade scenario assumes the new investment to be done gradually and the
burden for service users to be spread within a period of ten years. That is one of the reasons why the
tariff levels did not go that high. Also it is clear that state and financial institutions support will be
necessary to achieve much more ambitious scenarios (requiring higher investments) than our upgrade.
We believe that the goal set by the current government for creating a special investment fund for the
water sector in the amount of BGN 6.788 billion14 will be implemented and carried out by this and
next governments. From those funds around BGN 3.376 billion are needed for replacement of the old
network and BGN 1.1 billion for building and upgrading sewage in the towns above 10,000
inhabitants. The financing (more than BGN 1 billion) is about to come from tariffs, taxes collected for
concessions or contracts for private management of the current water supply and sewage companies.
The state budget is also to contribute in the amount of BGN 103 mln and BGN 737 mln are planned to
come from the EU ISPA program. The strategy envisaged the main investments (BGN 2.016 billion
for replacement of pipes and leakage reduction) to be carried out by the year 2010.
14 "Trud" newspaper as of Aug. 19, 2003 citing the minister of Regional Development and Public Works, Mr.
Valentin Tserovsky on the future of the water supply and sewage sector in order to make it compatible with the
EU standards. The money should be invested by 2015.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 35
6 Burden Indices Estimation
This chapter provides estimates of how much would be the financial burdens on the average household
based on the calculated tariffs from each scenario discussed so far. What we will try to find is whether
service users would be burdened to pay their increased bills, especially the wastewater component.
The chapter will start with general discussion of the topic and in the second part will focus on the
scenario results and estimates.
6.1 Ability of Service Users to Cope with Increasing Tariff Levels
As can be seen from the tables of the National Statistical Institute, the share of the food, beverages and
tobacco in the total composition of Bulgarian households' expenditures is above 40%, while in the
advanced countries it is 13-16%, and in the CEE countries - 25-30%. The share of electricity, gas and
water expenditures were between 10-15%. Bulgaria is below the poverty level standards of the
European Union. Average per capita income is low at only 28% of the EU average (in purchasing
power standards). However Bulgaria made good progress in the catching-up to EU income levels.15
The employment rate of the working-age population fell from 54.5% in 1997 to 50.7% in 2001. The
unemployment rate increased from 13.7% of the labour force to 19.9%. More than 60% of the
unemployed are long-term unemployed. Regional income differences are small, ranging from 23% to
28% of the EU average, with the exception of the Southwest region, which includes Sofia, where the
figure is 36.5% (data for level-2 statistical regions in 1999). Regional differences in unemployment are
more pronounced. While in the Southwest region the unemployment rate was 9.7%, in all other
regions it was above 20%, reaching up to 32.8% in the Northwest (data for level-2 statistical regions in
2001).
The low-income levels constraint poses limitation of the flexibility of tariffs as a tool to improve net
revenue margin. For example the household affordability criterion adopted in the World Bank's
restructuring and rapid assessment studies was that water and sewerage charges should not exceed five
percent (5%) of a single pensioner's income. The average pension is approximately BGN 80 (Euro 40)
per month. Pleven's water supply and sewage tariffs with the VAT amount to approximately one
BGN/m3 (BGN 0.99 for 2001). If a pensioner consumes 4 m3/month, he/she spends 4.9% of his or her
income on water and sewerage (without treatment) services. That is already close to the household
affordability criteria mentioned above.
There is, however, a recent optimistic trend in consumer spending and available income analysis with
increase in both the access of Bulgarians to money (either increased current income or better access to
borrowed money) and their willingness to spend it.16 Latest (January-July 2003) data on Bulgaria
shows a 10.6% increase in nominal gross household income, and 9.5% in real terms. The structure of
income remains largely unchanged. There is, however, a slight increase in wage income, at the
expense of decreases in non-wage labor income, unemployment benefits and social assistance, and
own production. While these changes are not significant enough to justify conclusions yet, combined
with the decrease in drawing from savings and a net increase in credits and loans (almost 75% in
nominal terms) it may well mean that there is an emerging trends towards expansion of consumption
and living on credit.
15 Data taken from Bulgarian National Bank Reports and the Commission of the European Communities "2002
Regular Report on Bulgaria's Progress Towards Accession".
16 The conclusion is taken from ING Bank, Sofia "Bulgaria Monthly" report as of November 2003 and more
specifically the section about consumer confidence.
Prepared by Dimitar Tropchev
36
UNDP/GEF Danube Regional Project
Table 11
Total Average Annual Income / Expenditures per Family's Person
Year
1995
1996
1997
1998
1999
2000
2001
2002
1000 BGL = 1 BGN (since 1999)
Total Expenditure
121 489
213 285 1 751 281 2 895 383
3 221
3 438
3 496
3 915
Consumer expenditure
98 971
177 948 1 449 301 2 376 420
2 695
2 860
2 963
3 335
Structure in %
Total Expenditure
100
100
100
100
100
100
100
100
Consumer expenditure
81.5
83.4
82.8
82.1
83.7
83.2
84.7
85.2
Food
39.7
43
45.6
41
37.8
38.4
39.8
37.6
Alcohol and tobacco
3.9
3.7
3
3.2
4
3.7
3.6
3.8
Cloths and shoes
8.4
6.9
6.7
6.7
5.9
4.5
3.9
4
Water, electricity, gas
7.8
10.1
10.6
11.6
13.3
13.6
13.3
14.5
Furniture and house
expenses
4.9
3.9
3.2
3.6
3.7
3.2
3.1
3.3
Healthcare
2.1
2.1
2.4
2.7
3.2
4
4.3
4.5
Transport
7.1
6.8
5.3
5.9
6.4
5.8
5.8
5.7
Communications
0.9
1
1.3
1.5
2.3
2.8
3.7
4.7
Leisure time
3.4
2.7
2.1
2.9
3.7
3.6
3.5
3.6
Other goods and
services
3.3
3.2
2.6
3
3.4
3.6
3.7
3.5
Taxes
6.5
5.8
6.2
6
4.8
4.1
3.4
3.3
Private household
activities
4.4
4.1
4.6
4.4
3.5
3.3
3.4
3.3
Others
7.6
6.7
6.4
7.5
8
9.4
8.5
8.2
NSI, 2003.
At this point, however, it is not clear whether this is a long-term trend, or a short-lived deviation.
Future dynamics will be governed by a complex interplay of several factors ranging from obvious
ones (e.g., world growth which stimulates Bulgarian exports and thus increased income; local
economic stability and continued growth of domestic demand to compensate for insufficient exports;
appropriate government policies regarding the widening current account deficit; continued stability of
the banking system and deepening of the financial intermediation; etc.) to less obvious ones (such as
whether changes in tax policy, contract registration requirements and other government policies will
succeed in reducing the size of the shadow economy, and whether that would be a good thing for the
actual rather than reported incomes; whether the current growth in consumer spending is the result of
optimal forward-looking rational thinking, or a temporary illusion, etc).
6.2 Overview of Households Income and Expenditure in Bulgaria
As already mentioned, the average household income in Bulgaria did not grow in real terms for the
last five years. The income from salaries went up just recently since 2002 while the level of the
pensions remained almost unchanged if compared to the growth in food expenditure (Figure 12 and
Table 12 below). From Appendix 1 we can take the average household income from salaries and
pensions and the amount of expenditures for water, electricity and gas. Particularly for the year 2002,
there is a clear tendency for upward movement of the spending related to water, electricity and gas as
a portion of the total expenses indicating both the lower real income trend and the increased cost for
providing the services.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 37
Table 12
Structure of Household's Expenditure in % from Total
Year
1995 1996
1997
1998
1999
2000 2001 2002
Total Expenditure
100 100
100
100
100
100 100 100
Consumer expenditure
81.5 83.4
82.8
82.1
83.7
83.2 84.7 85.2
Food
39.7 43
45.6
41
37.8
38.4
39.8
37.6
Water, electricity & gas
7.8 10.1
10.6
11.6
13.3
13.6 13.3 14.5
Taxes
6.5 5.8
6.2
6
4.8
4.1 3.4 3.3
Figure 12 Household's Annual Income and Expenditure per Item.
HH's Annual Income and Expenditure Items
Salaries
2500
2000
Pensions
1500
Food
BGN 1000
500
Water, el. and
gas
0
1999
2000
2001
2002
Taxes
Year
The data from the table and the graph above and the more detailed ones in Appendix 1 reveals some
important features regarding the income and expenditure structure of the average Bulgarian family17.
First, the high portion of food expenditure (close to 40%) and almost constant annual salary income
(less than 1,000 euros) for three consecutive years (1999 2001). Second, the growing share of the
water, electricity and gas items. Third, the sudden drop in 2002 in food expenditure in 2002. The last
factor combined with the more than one percent increase in water, electricity and gas item could
indicate that families are forced to give up some of their consumptions on basic necessities as food in
order to cover for the increasing prices of the utility and other services.
On the other hand we have the recent ING Bank report (Nov., 2003) where there is an increase in both
the access of Bulgarians to money (either increased current income or better access to borrowed
money) and their willingness to spend it. Those are interpreted as indicators for that households are
fairly optimistic about the future and prefer to take advantage of some form of credit and buy a better
product rather than to wait for the future or make do with a cheap lower-quality alternative. That leads
me to conclude that probably 2002 was not the year to indicate a downturn in Bulgarian economy and
17 We are primarily concerned with the last four years of the period shown (1999 2002) since due to the high
inflationary processes in 1998 and 1997 the data for those years looks distorted. The currency stabilization in
1999 with the introduction of the new lev (BGN) and the currency board a year earlier lead to lower inflation and
overall economic stability. The inflation rate for the period 1999 2002 was kept in the limits between 4% and
6%. For our analysis, the inflation adjustment is not that crucial since from Table 16 we can see the structural
breakdown of average household's expenses.
Prepared by Dimitar Tropchev
38
UNDP/GEF Danube Regional Project
deterioration of household income but rather a difficult year, the consequences of which were
overcome in the next 2003.
Nevertheless the growing portion of utility expenditure and insecure future income trends coupled
with the deteriorating fixed assets and equipment of almost all water companies in the country requires
immediate attention from government side and that of the management of the utility companies alone.
The measures that should be taken may be require a bit of more painstaking approach but one which
could lead to a sustainable improvement in their operations. Our scenarios suggest some possible ways
from where to start. However, before incorporating them into a strategic reform proposal it is worth
trying to show that all of them are realistic and would not provide unbearable burden for the
population, especially the most vulnerable part of it the pensioners.
6.3 Scenarios Burden Index Estimations
The low-income levels constraint poses limitation of the flexibility of tariffs as a tool to improve
balance of accounts. For example the household affordability criterion adopted in the World Bank's
restructuring and rapid assessment studies was that water and sewerage charges should not exceed five
percent (5%) of a single pensioner's income. The average pension is approximately BGN 85 (Euro 46)
per month. Pleven's water supply and sewage tariffs with the VAT amount to approximately 1.00
(one) BGN/ m3 (BGN 0.99 for 2001). If a pensioner consumes 4 m3/month, he/she spends 4.6% of his
or her income on water and sewerage (without treatment) services. That is already close to the
household affordability criteria mentioned above.
Table 13 compares the new scenarios tariffs burden with the original, Baseline A1, using the average
household income from pensions (BGN 85/month) and the same consumption as in the example above
(4 for water supply and 80% of that or 3.2 m3/month wastewater discharge). We have selected that
part of household's income because it captures the most socially vulnerable part of the population and
is also highly sensitive to price changes. Though probably the pensions will be actualised and
increased once Bulgaria becomes member of the EU, the price level and cost of leaving will also
change probably more than that. Besides due to general problems with the "pay-as-you-go" system of
social insurance with the aging of population, the country will face additional problems in that area
that would not allow the level of pensions to grow that much.
Table 13
Monthly payment burden on the average pensioner income (VAT included).
Service user category Baseline 1A Baseline 1B
Sustain 2A
Upgrade 3B
Households A1
4.6 %
4.6 %
5.4 %
5.7 %
Households A2
4.8 %
4.7 %
5.6 %
6.2 %
Households B
4.2 %
4.1 %
4.5 %
4.5 %
The sustainability scenario marks a turning point in Pleven RWSSC operations. Not only the loss of
more than BGN 1.1 mln from the previous Baseline 1B scenario is covered but also we have
introduced investments that substantially reduce leakage and improve collection of receivables. With
all those changes going on it is not surprising that Sustain 2A is the scenario with higher burden
estimates than the previous ones. It is, however, not substantially above the 5% reference level.
Additional observation from the above table is that the total investment and improvements done in the
system would almost not affect the households (pensioners') with water supply service only. Even for
the investment intensive Upgrade 3A scenario the burden remained three points above the original and
less than 5% of their income. On the other side, pensioners with water supply and treated sewage will
have to spend around BGN 0.7 more per month18 (from BGN 4.06 to BGN 4.77) to) for their bills.
18 That amounts to additional BGN 8.5 per year.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 39
Table 14 examines burden payments changes but this time for the average household, not the most
vulnerable part of the population. Based on the consumption and tariffs estimates (ASTEC's
scenarios) that most affected by the proposed investments category of service users (with both water
supply and treated sewage) will have to bear approximately 22.5% higher annual payment burden as
shown below. The increase from about BGN 82 to BGN 100 per year reflects decreased consumption
levels as well (from 80 to 76 m3/year). For some households probably the increase tariffs will
represent bigger consumption reduction.
Table 14
Annual payment for households with water supply and treated sewage (with VAT).
Households A1
Households A2
Households B
Scenario
(water supply and non-treated (water supply and treated
(water supply service only)
sewage)
sewage)
Baseline 1A
77.59 BGN
81.44 BGN
72.12 BGN
Upgrade 3B
92.03 BGN
99.74 BGN
76.03 BGN
Still that amount of almost BGN 100 (with VAT) for water and wastewater services account for just
2.8% of the average year 2001 income level (BGN 3,600). It is an acceptable burden given the past
trends and the significant improvements in the quality of service provision and efficiency of
operations, which saves enormous resources for the community that would have been otherwise
wasted. The fact that it may represent more than 6% of the average pensioner's income could also
mean that pensions in Bulgaria are substantially lower and that probably they need to be more
adequately updated to reflect the increasing prices.
From the presented results we cannot conclude that if Pleven RWSSC adopts one of the above
scenarios as a strategy for future developments it will alter the 2001 expenditure for average
household user with no more than 23% percent (for HH A2 with water supply and treated sewage).
That expenditure is still below 3% of the average household's income and would probably not incur
unbearable burden for them. On the other hand, pensioners would have to allocate at least 6.2%
(instead of 4.8%) on average from their incomes in order to meet the new tariffs. Whether this increase
would represent a significant burden for them is an issue to be resolved. For that purpose regulatory
bodies can adopted a 5% target level for water related expenses per pension income as proposed by the
World Bank studies or any other measure justified by the local conditions.As shown from the tables
even the original tariffs were creating a burden close to the 5% barrier. Additional clarifications
regarding the difference between pensioners' household consumption and average family household
have to be made in order to assess the appropriateness of the figures and for the sake of the present
comparative analysis.
Besides even if for the purpose of our analysis this 6.2% of income is acceptable increase on that
expenditure item, if we want to be more precise, we should have constructed a forecast for the
expected trend on the average household income and expenditure. Then having in mind the
inflationary expectations we could have said "yes, the new tariffs would not cause additional burden
on excess of 5% of the average pension five or ten years from now and the expected increase in
income would allow that additional percent of expenditure if all the estimations were correct".
However, we have doubts that the creation of such a forecast is really justified. The reason why this is
the case is that in our model the scenario input can be updated any time to reflect the present terms of
any future developments such as inflation prediction or any changes in the cost structure of the
company. That is why the management can react quickly at least by estimating what tariff strategy to
pursue to reflect sudden negative or positive trends in the overall economic indicators and in the
household income developments in particular. Beyond the scope of our analysis remain the issue
concerning the level of the pensions in Bulgaria and the need for their actualisation.
Prepared by Dimitar Tropchev
40
UNDP/GEF Danube Regional Project
7 Reform
Proposals
Having argued about the feasibility of the proposed strategic scenarios, we would now proceed with
the particular reform proposals and recommendations for action plans that Pleven RWSSC can adopt
to solve its financial and efficiency problems.
7.1 Overall Country Developments in the Water Sector
There are three major events that will shape the future developments in the water sector in Bulgaria.
First, the introduction of the European standards in all spheres of the economy and water services
included. The quality of waters and the norms for treatment of wastewaters will be affected especially.
The second event is the acceptance of the last corrections of the Law for Modification and Addition to
the Water Law. That modification should clarify the property rights for exploitation of the water
supply and sewage networks, according to whether they serve one or more municipalities. As a result,
we will have water companies that are only managing units, and that only operates the water supply
and sewage systems. The third event is the expected adoption (end of 2003) of the Strategy for
Managing and Development of the Water Supply and Sewage in Bulgaria.
The strategy suggests the adoption of a new Regulation Law for Water Supply and Sewage Services
that will solve the issues related to property rights over the WS&S companies and regulate the tariff
changes and quality of the services. It also proposes the creation of National Regulatory Commission
(as part of the Council of Ministers) for all water supply and sewage service activities. What the
strategy prescribes is state regulation over the tariffs and charges, quality and standards in the water
sector, periodic control and monitoring of water service units' operations and reports. To a lesser
extent is explains the different models of service management and private sector participation. Some
of the forms of management mentioned are contract for operation and service, management contract,
concession contract, BOT (build, operate and transfer) contract or the mixed (public-private) holdings.
However, the role of the private sector is far from clear so far.
7.2 Case Specific Reform Proposals
It is not an easy task to formulate reform proposals concerning a water company coincident with so
many forthcoming changes in the water sector legislation. However, there are five major conclusions
that can be drawn from the analysis so far:
The recent (2001) situation of Pleven RWSSC (small net revenue and low receivables
collection) does not allow sufficient investments in the repair and efficiency
improvements;
Our scenarios suggest that if Pleven raises levels of investment to reduce substantially
water losses and unpaid bills it gets enough revenue to nearly fully offset those
investments;
Third, the most significant changes in tariffs take place in the wastewater service section
as sewage collection and treatment are among the issues of priority when new investment
needs are considered;
Fourth, the overall burden of water and wastewater service payments for households was
already high in 2001 (4.8 of the average pension income for HH with water supply and
treated sewage). The additional scenario development (including the upgrade) did not rise
that burden higher then 6.2% of the average pension. However, that could be unacceptable
given the fact that the much-cited 5% affordability criterion for environmental protection
will be.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 41
For the average households (with annual income of BGN 3,600 as of 2001) even the
highest estimated tariff levels for users with both water supply and treated sewage (in the
upgrade scenario) would not cause a burden in excess of 3% of their income.
Having in mind these four conclusions, we will now examine the issues developed in Chapter 3 and
addressed with the scenario analysis performed so far.
7.2.1 Tariffs Setting Calculations
The tariff calculation methodology received its consideration throughout every scenario setting. The
first Baseline 1B cost recovery scenario showed what are the minimum tariffs the company should
charge if it wants to cover the full costs of its operations. One of the basic implications to follow was
that we used cost recovery as a way to assess our new investments and proposed changes in the
system. The analysis presented in the scenarios chapters compared the impact of different investment
developments on tariff settings. We have tried to find out a way in which investment costs could be
included in the calculations and what could be the impact of their allocation. We demonstrated that
allocation could have implication of tariff levels, i.e. the higher the costs assigned to a specific user
category, the greater its tariffs. Based on the scenarios analysis, we could conclude that costs
distribution among service users could play a critical role for tariff justification.
The negative net result in Baseline 1B (BGN 1.1 mln loss) raised another issue of concern the
collection of outstanding payments. In order to have a better picture of real costs and include them in
tariff calculation the avoidance payments should also be considered. We have done that in the
sustainability, upgrade and other scenarios some of which are shown in the appendixes. The overall
effect was increased tariffs. Nevertheless, these costs are an important factor when the burden of non-
payers on the system has to be estimated.
7.2.2 Receivables and Debt Collection
Our proposals for investment programs and strategic decisions would prove in vain if we did not take
into account the problem with accumulating debt. As shown in Chapter 3 the percentage of receivable
from total revenue grew substantially (from 9% to 21%) for the period 1998 2002. Though we
should distinguish between receivables and avoidance of payments, both figures had increased at
present. Unfortunately there is no a short cut or a possible scenario that could show us how to deal
with that problem. We believe that the management of the company is well aware of the options that
can help improve the situation. What was our task within the scenario developments and related to that
particular issue is to show what burden those avoided payments could pose on the system. To what
extent the improvements in debt collection could release resources for investment and alter the tariff
setting and financial results (Upgrade 3A scenario). As mentioned before the negative final balance in
the cost recovery cases and partly the tariff increase in the "cost of non-payers covered" scenarios was
due mainly to the portion of uncollected debt.
Another part is a moral side of the issue as well. The socially disadvantage groups and those with big
amount of debt should probably receive some special treatment or conditions that would allow them to
use water for their daily needs despite of their limited ability to pay. When we have asked the model to
calculate by how much the tariff of "regular payers" should increase to cover the ones who avoided
payment, the results were not encouraging.19 The tariffs for water went up with almost 8% for all user
categories and the increase for wastewater service was more than 10%. The outstanding debt
deteriorated further. So covering non-payers could only signal how much burden such avoidance cause
to the regular users. That is why we have added in scenario Sustain 2A additional cost item related to
expenses incurred for improvement of receivables collection. We have estimated that cost to be around
19 Additional scenarios in Appendix II.
Prepared by Dimitar Tropchev
42
UNDP/GEF Danube Regional Project
15% (or BGN 0.17 mln) of the original avoidance of payments. The result was 34% decrease in
outstanding debt (or approximately BGN 0.39 mln). We believe that such an investment strategy is
always worth pursuing as long as the benefits of it offset its costs (as it is in our case).
7.2.3 Leakage
Reduction
Another investment strategy that proved its positive net effect was the leakage reduction program
proposed in the Sustain 2A scenario. That is one of the two things generally missing in their full part in
the tariff calculations apart from avoided payments. We have tried to address the former in the leakage
scenarios and find out how the tariffs should look like if management efforts to reduce water losses
continue further and are targeted to achieve substantial improvement to reach 22% of water produced
and imported20. The need for new investments in addition to the funds associated with the World Bank
loan would be relatively substantial and we have estimated them to BGN 3.5 mln. However, the fact
that we ended up with more than 12.8 mln cubic meters of recovered water losses seems to justify
such an investment. At 2001 household water service tariffs (without VAT) this is approximately
BGN 9.6 mln.
While household might experience additional burden during the period necessary for the sustainable
developments to take place, the effect of leakage reduction on Pleven RWSSC operational and
financial results would be more than beneficial. Water loss control with be set in desirable levels and
tariffs will be substantial enough to cover the required investments. The raise in wastewater tariffs
especially for households and budget entities would probably encourage them to save water and to
improve water use efficiency (repair pipes, not use drinking water for irrigation or other purposes,
discourage illegal connections in case the penalty is set high enough). In addition, the new investment
would ensure that Pleven RWSSC had improved leakage monitoring and control.
If planned and executed properly, the Sustain 2A scenario will not only increase the operating
efficiency and save water resources but also will improve the financial situation of the company and
ensure its sustainability. Issues for consideration in similar reform proposals would be to what extent
to reduce water losses so that the required investment does not offset the benefits from the reduction
itself. And second, the importance to convey the improved water supply management by lowering
tariffs for service users at least after the savings and efficiency improvements take place. That would
be a sign that their money had not gone in vain and that the initially higher tariffs had proved their
purpose. Third strategic issue for consideration will be naturally the sources of funds for that future
investment and their repayment.
7.2.4 Future Investment Needs and Available Sources
It is difficult if not impossible for Pleven RWSSC to self-finance its operations with the present state
(2001) of operations and net revenue margin. Moreover, the network probably requires structural
improvements and replacements that need substantial provision of funds. In that study we have not
aimed to find out what are the exact channels with the help of which Pleven RWSSC could solve its
capital deficiencies though government support and possible ISPA financing were mentioned. Our
goal was to check if given that funds are available through the normal sources like infrastructure
improvement state programs, banks, grants and others, the possible investment decisions could be
supported by the system and the repayment could be ensured through appropriate tariff settings.
We have tried to point out some examples with investment like the World Bank Loan, governmental
grants and company own investment sources. If the objectives are met and the final results of these
investments programs are similar to what we have modeled with the help of ASTEC scenarios than we
20 The 22% figure is estimated given that the original level of consumption (16.2 mln cubic meters for year
2001) is preserved. In that case the new water produced and imported amount would have to be 20.7 mln cubic
meters (not 33.6 mln cubic meters).
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 43
have more than positive developments in leakage reduction, financial efficiency (cost allocation and
recovery), wastewater treatment plant and equipment improvements and more users who utilize the
treatment facilities of the company. That additionally would have a beneficial effect on water pollution
reduction and overall environmental protection. On the tariff side, the additional burden (less than 3%
on its highest) for the average household would probably be in the acceptable norm but average
pensioners could be adversely affected by the proposed changes (6.2% of his/her income have to be
dedicated to water and sewage payments).
The last but not the least proposal concerning the insufficient investment resources and the need for
improved quality and efficiency of wastewaters treatment facilities is in the case when external
funding is hard to obtain. When self-financing is the only feasible option for a company, it is through a
well defined (planned and balanced) investment decision whose impact is reflected in tariffs
calculation through the use of "full cost recovery", that will allow reserves to be build in order to
finance timely interim decisions. Persistency and publicity of management actions and achieved
results could be tools that additionally enhance the sustainability of the system. The financing
possibilities also include the consideration for concession and privatization options or other means for
raising additional capital (bond issuance or selling shares to the stock market). The capital market in
Bulgaria though not so developed allow for certain options that can be utilized in the case of Pleven
RWSSC and other water companies.
7.2.5 Timing
of
Reforms
My last point would be not a reform proposal in its normal sense but a general recommendation for
any reform proposal listed so far. We would argue that timing of the reforms is as important as the
reforms themselves. For example we cannot start by introducing a two-part water tariff without first
considering what the level of that tariff should be. And to do that we need to start by assessing how all
the costs that Pleven RWSSC incurs in the process of its activities are reflected into that tariff. The old
methodology for price setting is abandoned for more than three years but the company (and most of
the others in the sector) is still using it. What else could the management do to improve the efficiency
of its financial planning? One possible solution is to introduce the method of full cost recovery in the
calculations for water and wastewater tariffs. By doing this, the financial analyst would probably
consider the cost of leakage and that of non-payers in the overall system. Ambiguity that arises from
depreciation expense calculations could also be avoided if we think of replacement costs and ignore
sunk cost in our calculations. All that reflected in careful costs allocation and appropriate tariff settings
could possibly improve the evaluation process for new investment and other strategic decisions.
Prepared by Dimitar Tropchev
44
UNDP/GEF Danube Regional Project
8 Appendix I. Household Income and Expenditures
(1995 2002)
8.1 Average Households Income by Sources
Year
1995
1996
1997
1998
1999
2000
2001
2002
1,000 BGL = 1 BGN
Income
119 474
199 935 1 807 392 2 960 359
3 321
3 530
3 601
4 029
Salaries
65 833
104 143
963 646 1 583 359
1 749
1 695
1 711
1 978
Additional
5 079
9 346
74 008
122 271
218
228
217
224
Entrepreneurship
5 098
12 004
90 689
171 152
182
194
179
226
Property
967
2 352
11 380
30 988
35
33
30
34
Unemployment compensations
701
993
11 485
17 751
41
49
50
43
Pensions
24 975
43 077
405 272
684 086
741
934
1 022
1 061
Children Allowances
2 409
3 403
31 181
39 292
37
35
29
26
Other SS
1 737
2 400
26 952
38 208
46
51
56
86
Private household activities
6 483
11 244
110 126
129 505
115
117
116
120
Sales of property
1 574
1 684
12 814
12 425
12
20
19
25
Others
4 618
9 289
69 839
131 322
145
174
172
206
Structure in %
Income
100 100
100
100
100
100 100
100
Salaries
55.1 52.1
53.3
53.5
52.7
48 47.5
49.1
Additional 4.3
4.7
4.1
4.1
6.6
6.5
6
5.6
Entrepreneurship
4.3 6
5
5.8
5.5
5.5 5
5.6
Property
0.8 1.2
0.6
1
1
0.9 0.8
0.9
Unemployment
compensations 0.6 0.5
0.7
0.6
1.2
1.4 1.4
1.1
Pensions
20.9 21.6
22.4
23.1
22.3
26.5 28.4
26.3
Children
Allowances
2 1.7
1.7
1.3
1.1
1 0.8
0.6
Other
SS
1.5 1.2
1.5
1.3
1.4
1.5 1.6
2.1
Private
household
activities
5.4 5.6
6.1
4.4
3.5
3.3 3.2
3
Sales
of
property
1.3 0.8
0.7
0.4
0.4
0.6 0.5
0.6
Others
3.8 4.6
3.9
4.5
4.3
4.8 4.8
5.1
Since 1999 the new lev or BGN was introduced (1 BGN equals 1,000 BGL).
Source: NSI.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria 45
8.2 Average Household Expenditure by Item
Year
1995
1996
1997
1998
1999
2000
2001
2002
1000 BGL = 1 BGN (since 1999)
Total Expenditure
121 489
213 285 1 751 281 2 895 383
3 221
3 438
3 496
3 915
Consumer expenditure
98 971
177 948 1 449 301 2 376 420
2 695
2 860
2 963
3 335
Food
48 205
91 649
799 136 1 179 618
1 216
1 321
1 393
1 471
Alcohol and tobacco
4 808
7 831
52 084
92 890
130
127
124
148
Clothes and shoes
10 161
14 635
117 920
194 560
190
154
137
158
Water, electricity, gas
9 482
21 476
185 016
337 122
428
466
465
566
Furniture and house expenses
5 962
8 377
55 893
105 369
119
109
110
129
Healthcare
2 582
4 417
41 991
78 233
104
139
150
176
Transport
8 590
15 246
93 249
170 423
206
198
204
222
Communications
1 098
2 036
21 847
44 586
75
98
128
182
Leisure time
4 116
5 565
36 959
86 014
119
124
124
141
Other goods and services
3 967
6 716
45 206
87 605
108
124
128
142
Taxes
7 852
12 356
109 115
171 884
156
142
120
128
Private household activities
5 383
8 654
81 156
128 644
112
113
118
128
Others
9 283
14 327
111 709
218 435
258
323
295
324
Structure in %
Total
Expenditure
100 100
100
100
100 100 100
100
Consumer expenditure
81.5
83.4
82.8
82.1
83.7 83.2 84.7
85.2
Food
39.7 43
45.6
41
37.8 38.4 39.8
37.6
Alcohol and tobacco
3.9 3.7
3
3.2
4 3.7 3.6
3.8
Cloths
and
shoes
8.4 6.9
6.7
6.7
5.9 4.5 3.9
4
Water,
electricity,
gas
7.8 10.1
10.6
11.6
13.3 13.6 13.3
14.5
Furniture
and
house
expenses 4.9 3.9
3.2
3.6
3.7 3.2 3.1
3.3
Healthcare
2.1 2.1
2.4
2.7
3.2 4 4.3
4.5
Transport
7.1 6.8
5.3
5.9
6.4 5.8 5.8
5.7
Communications
0.9 1
1.3
1.5
2.3 2.8 3.7
4.7
Leisure time
3.4 2.7
2.1
2.9
3.7 3.6 3.5
3.6
Other
goods
and
services
3.3 3.2
2.6
3
3.4 3.6 3.7
3.5
Taxes
6.5 5.8
6.2
6
4.8 4.1 3.4
3.3
Private
household
activities
4.4 4.1
4.6
4.4
3.5 3.3 3.4
3.3
Others
7.6 6.7
6.4
7.5
8 9.4 8.5
8.2
Source: NSI
Prepared by Dimitar Tropchev
46
UNDP/GEF Danube Regional Project
9 Appendix II. Additional Scenario Developments Including
Marginal Cost Pricing
The results are presented for information purpose only and should not be compared with the
scenarios analyzed in the main text since input parameters and model specifications may
differ.
9.1 Scenarios
Description
Short-term:
S1-Basic: scenario without amortization or investment figure current tariffs and charges
used; cost of non-payers are not covered; no cost recovery, no marginal cost pricing.
S2-Basic.Invest scenario with average investment for the last three years current tariffs and
charges; cost of non-payers are not covered; no cost recovery, no marginal cost pricing.
Medium-term:
S3A-CR: cost recovery scenario. No marginal cost pricing. Costs of non-payers are not
covered.
S3B-CR.MCP is also a cost recovery scenario but this time with marginal cost pricing added;
costs of non-payers are not covered.
S3C-CR.NonPayers is a full cost recovery scenario. No marginal cost pricing. Costs of non-
payers are covered.
S4A-Leakage is a leakage scenario households (HH) are responsible for 3 times more
leakage. Costs of non-payers are not covered. Cost recovery, no marginal cost pricing.
S4B-L.CR.MCP addresses leakage as well HH 3 times more leakage. Cost recovery with
MC pricing; costs of non-payers not covered.
S4C-L.Reduction: Leakage scenario (30% less water losses due to new investment, no MC
pricing). New connections to water and sewage with treatment transferred from existing water
service and water and sewage without treatment accounts. No change in the number of service
users accounts assumed.
Long-term:
S5-LongTerm: WWTP investment scenario. Leakage decreased to 36% of water produced;
collection of receivables improved by 50%; MC pricing; FC recovery; non-payers are not
covered; new fixed and variable costs for water and wastewater services. New accounts to the
water and sewage with treatment category. No change in the number of service users accounts
assumed.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria
47
9.2 Summary
Results
Table 15
Water Service Tariffs (in BGN)
Number
S2-
S3B-
S4B-
S5-
S1-
S3C-Non
S4A-
S4C-L.
Service user category
of
Basic. S3A-CR
CR.MCP
L.CR.MCP
Long-Term
Basic
Payers Leakage
Reduction
Accounts
Invest
FT21
VT22
FT
VT
FT
VT
Households A1 (WSc-SNT)
13,669 0.75
0.75 0.65 28.02 0.29
0.70 0.77 31.82 0.34
0.66
29.09 0.30
Households A2 (WSc-ST)
54,012 0.75
0.75 0.65 28.28 0.29
0.70 0.77 31.82 0.34
0.65
28.95 0.30
Households B (W)
73,973 0.75
0.75 0.66 28.14 0.29
0.70 0.77 31.82 0.34
0.64
29.20 0.30
Budget entities A (WSc-SNT)
261 0.76
0.76 0.66 4261.86 0.29
0.75 0.48 3,378.27 0.22
0.67
4428.34 0.30
Budget entities B (W)
673 0.76
0.76 0.66 1345.50 0.29
0.75 0.46 1,055.08 0.21
0.66
1397.29 0.30
Industry and agriculture A1 (SNT)
628
Industry and agriculture A2 (ST)
4,013
Industry and agriculture B (W)
6,912 0.76
0.76 0.66 62.37 0.29
0.71 0.47 49.43 0.21
0.66
64.78 0.30
Total:
154,141
Table 16
Wastewater Service Tariffs (in BGN)
Number
S2-
S3B-
S4B-
S5-
S1-
S3C-Non S4A-
S4C-L.
Service user category
of
Basic. S3A-CR
CR.MCP
L.CR.MCP
Long-Term
Basic
Payers Leakage
Reduction
Accounts
Invest
FT23
VT24
FT
VT
FT
VT
Households A1 (WSc-SNT)
13,669 0.07
0.07 0.17
7.97 0.04
0.19 0.17
7.79 0.04
0.17
10.72 0.04
Households A2 (WSc-ST)
54,012 0.12
0.12 0.17
8.05 0.04
0.18 0.17
7.79 0.04
0.17
10.66 0.07
Households B (W)
73,973
- - -
-
-
- -
-
-
-
-
-
Budget entities A (WSc-SNT)
261 0.07
0.07 0.17 1,364.33 0.04
0.19 0.17 1,434.13 0.04
0.17
1,833.40 0.04
Budget entities B (W)
673
- - -
-
-
- -
-
-
-
-
-
Industry and agr. A1 (SNT)
628 0.07
0.07 0.18 66.91 0.04
0.19 0.18 66.80 0.04
0.21
90.44 0.04
Industry and agr. A2 (ST)
4,013 0.52
0.52 0.18 268.57 0.04
0.20 0.18 268.12 0.04
0.20
262.22 0.14
Industry and agriculture B (W)
6,912
- - -
-
- -
-
-
-
-
-
Total:
154,141
21 FT means Fixed Tariff.
22 VT means Variable Tariff.
23 FT means Fixed Tariff.
24 VT means Variable Tariff.
Prepared by Dimitar Tropchev
48
UNDP/GEF Danube Regional Project
Figure 13 Comparison between Total Unpaid Tariffs and Balance of Payments for Water and Wastewater Services
Avoidance of Payments & Balance of Accounts
in M ln BGN
-0.59
0.14
0.46
S5-LongTerm
-0.32
0.19
0.85
S4C-L.Reduction
-1.03
0.20
0.84
S4B-L.CR.M CP
-0.98
0.18
0.80
S4A-Leakage
0.004
0.20
0.92
S3C-NonPayers
-1.08
0.20
0.89
S3B-CR.M CP
-1.03
0.85
0.18
S3A-CR
1.40
S2_Basic.Invest
0.28
0.96
2.58
S1-Basic
0.28
0.96
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
W ater
W astew ater
Balance of Acc.
A Case Study of Municipal Water System Management and the Impacts of Tariff and Effluent Charges: Pleven, Bulgaria
49
Figure 14 Annual Water and Wastewater Payments per Household (no VAT)
Annual Payment per Household by Scenario and SU Category
80.00
70.00
60.00
B
50.00
G
40.00
N
30.00
20.00
10.00
0.00
S1-Basic
S3A-CR
S3C-NonPayers
S4B-L.CR.MCP
S5-LongTerm
S2-Basic.Invest
S3B-CR.MCP
S4C-L.Reduction
S4A-Leakage
HH
HH
HH
Prepared by Dimitar Tropchev
50
UNDP/GEF Danube Regional Project
Figure 15 Scenario Breakdown for Total Water Consumption by Category of Service Users (in cubic meters per year)
W a t e r C o n s u m p t i o n p e r S e r v i c e U s e r C a t e g o r y
m 3 / y e a r
2 5 , 0 0 0 , 0 0 0
2 0 , 0 0 0 , 0 0 0
1 5 , 0 0 0 , 0 0 0
1 0 , 0 0 0 , 0 0 0
5 , 0 0 0 , 0 0 0
0
S 1 - B a s i c
S 2 -
S 3 A - C R
S 3 B -
S 3 C -
S 4 A -
S 4 B -
S 4 C -
S 5 -
B a s i c . I n v e s t
C R . M C P
N o n P a y e r s
L e a k a g e
L . C R . M C P
L . R e d u c t i o n
L o n g T e r m
H o u s e h o l d s A 1
H o u s e h o l d s A 2
H o u s e h o l d s B
B u d g e t e n t i t i e s A
B u d g e t e n t i t i e s B
I n d u s t r y a n d a g r i c u l t u r e B
Figure 16 Total Sewage Discharge per Scenario and SU Category.
A n n u a l W a s t e W a t e r D i s c h a r g e p e r S e r v i c e U s e r C a t e g o r y
m 3 / y e a r
2 0 , 0 0 0 , 0 0 0
1 8 , 0 0 0 , 0 0 0
1 6 , 0 0 0 , 0 0 0
1 4 , 0 0 0 , 0 0 0
1 2 , 0 0 0 , 0 0 0
1 0 , 0 0 0 , 0 0 0
8 , 0 0 0 , 0 0 0
6 , 0 0 0 , 0 0 0
4 , 0 0 0 , 0 0 0
2 , 0 0 0 , 0 0 0
0
S 1 - B a s i c
S 2 -
S 3 A - C R
S 3 B -
S 3 C -
S 4 A -
S 4 B -
S 4 C -
S 5 -
B a s i c . I n v e s t
C R . M C P
N o n P a y e r s
L e a k a g e
L . C R . M C P
L . R e d u c t i o n
L o n g T e r m
H o u s e h o l d s A 1
H o u s e h o l d s A 2
B u d g e t e n t i t i e s A
I n d u s t r y a n d a g r i c u l t u r e A 1
I n d u s t r y a n d a g r i c u l t u r e A 2