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 ­ Summary













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pertaining to a specific country or case study community may now be out of date.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

Overview of Issues and Proposed Tariff and Charge Reforms: Bulgaria
3
Overview of Issues and Proposed Tariff and Charge
Reforms: Bulgaria

On its way to European Union accession Bulgaria is facing numerous challenges and is undergoing
significant reforms. The changes that take place in water services sector could not be viewed
separately from the general changes in regard to environmental protection and regional development
policies. It is more than clear that achieving progress in one area and neglecting another would not
lead to much success in practice. Moreover, due to the inherited from the past integration of public
services, it is not easy to address changes in one area without considering the necessity for change in
the whole sector. In that sense when we are discussing reforms related to pollution reduction, we need
to examine closer the present situation of the water service sector, the sustainability of operations and
potential future developments. That could be the starting point or the basis, which determines the
particular framework for reforms consideration and proposals selection.
Speaking about privatization or any other ownership reform for example would be meaningless if not
thinking how to prepare the ground for such a change and bring in line all stakeholders' interests and
efforts. Local circumstances and conditions could be an obstacle or a benefit for any policy we are
trying to promote. That is why when developing the Bulgarian National Profile and Case Study, one of
our prime objectives was to be more practical in addressing pressing local (regional) problems. To
achieve our goal and implement effective nutrient reduction reforms, we have to prepare the ground
for them. First by starting with stabilizing the existing water service system and ensuring its
sustainability not just one year from now but also in the future.
The need to assess areas for potential improvements and unutilized resources is vital for the water
sector in Bulgaria. In its efforts to reach EU standards and requirements, our country is trying to
implement reforms that might not always be effective given the local conditions. For example, the
transition from centrally planned economy to a market oriented one requires the transfer of authority
related to local policy decisions to municipal governments. However, if we couple that need with the
fact that existing infrastructure was built in large national scale not taking much into account any
smaller administrative divisions than we have a problem. Adding the state of amortization of that
infrastructure and the government budget constraints we have already a big problem.
Bulgarian water supply and sewage companies need investments and government support to handle
issues like replacement of outdated equipment, building new WWTPs, increasing the number and
coverage of sewage connection, etc. However, if the central budget is limited and there might be
obstacles to transfer state resources into private hands what other options are there? One possibility is
to try to utilize the available resources. On larger scale, Bulgaria has knowledgeable experts,
committed to reforms government and already built though not in ideal shape infrastructure. What we
do not have is functioning effluent charges system, effective incentive schemes for industries to
commit themselves to pollution reduction and society well aware and active in issues related to
environmental protection and resource savings. There are, however, additional, unutilized resources on
water companies and government levels that could positively change the present situation.
In the report to follow we will try to show that there are substantial areas for improvement that can be
utilized to address the existing problems that Bulgarian water sector is facing. Furthermore, with
cooperation, accurate data, and disciplined decision making on the part of policy makers and water
units management solutions could be found that reduce water pollution from municipal water systems
at a reasonable cost. In addition the current steps taken towards better strategic government planning
and vision for the future of the sector as outlined in the National Priority Programs, cooperation
projects between Ministry of Regional Development and Public Works and Ministry of Environment
and Waters, give signals for positive developments in that direction. The envisaged involvement of the
private sector participation in the operation and management of the water companies could also
contribute for the resolution of the problems arising in the case of state acting as both owner and
regulator trying to protect socially disadvantage groups of the population.
The unutilized resources and areas for improvement in question could be divided in several streams.
One of them is related to the possible reassessment of existing tariffs and charges design mechanism
4
UNDP/GEF Danube Regional Project
so that they reflect real costs of production. The present practice is that only water billed to consumers
is taken into account and expenses that are related to investment and water losses above 25% are not
considered. Another area for improvement is related to the cross subsidizing among service users.
Industrial users pay in general higher water and waste water tariffs than budget entities and
households. Though aimed to protect social interests, such a redistribution create few incentives for
water saving and its efficient use. It could also very well erode profits for water companies as industry
has better options to shift to alternative sources (its own) of water supply. In addition the current
practice of pollution fines encourages in some cases firms to pay and pollute instead of build WWTPs
or take other measures to prevent pollution.
Yet third stream of unutilized resources comes from the shift in management and organizational
practices towards pro-service and cost-reducing decision-making. The use of these is aimed to make
good, transparent choices about investments and increase the collection efficiency of outstanding debt
that most of the water companies carry for more than a year. The need for good, long term investment
decisions is more and more pressing as the equipment and distribution network are depreciating
further and have to be replaced. The potential dilemma, in case the objective is met, would be how any
net-revenues from higher tariffs are to be invested so that to have practical beneficial effect.
Recently much hope is laid on the positive effects of private sector participation in the water sector.
Apart from additional capital to increase investment opportunities, the interest-driven efficiency gains
in daily operations could be more than the when the water company was state controlled. However,
where some people see benefits other see danger. The usual concern is that private owners would not
care about the socially disadvantaged part of the community and would probably exploit the company
equipment and infrastructure with the objective to obtain short-term economic profits. That would
threaten the long run sustainability and availability of water services or at least face community with
substantial costs to repair the damages.
The possible areas for improvement and unutilized resources have their costs and each carry some
potential risks. It will be our goal not only to address them but also to render their use meaningful
through practical implementation in concrete reform proposals. In this sense, a major task throughout
the National Profile and the Case Study analysis will be not only to present a detailed overview of the
local conditions with existing problems and possible areas for improvement but also to try to develop a
basis for selection among potential reform proposals. For the purpose of the present study we will
attempt to recommend those that have relevance to ensuring the sustainability of the system and
resulting in possible upgrades related to the efficiency of operations and closely linked to water
pollution reduction and service quality.


Dimitar Tropchev, Bulgaria

Document Outline