, " 71986 , Water and Sanitation Utilities Partnership Report =#I: 3 Utility Reform and Environmental Clean-up in Formerly Socialist Countries REPORT OF A WORKSHOP ON THE BALTIC SEA Introduction refonn in the fonnerly.socialist trophication. andlocalizedinaeases The overall objective of the countries bordering the Baltic Sea. in heavy metals and persistent or­ newly created Utllities Parblership is The focus of the workshop was on ganic compounds. In recent de­ to improve hwnan well-being and the twin challenges facing water cades the municipal and industrial the environment by improving the utUities in Russia, Estonia, Latvia, pollution loads into the Baltic from perfonnance C?f urban water and Uthuania and Poland: becoming the market economies have de­ sanitation utilities. The Partnership modem, efficient, self-financed clined substantially, while the in­ was initiated because there is an enterprises providing good ser­ puts from the socialist countries unprecedented window of opportu­ vices at reasonable costs to con­ increased substantially. nity for reforming water and sanita­ sutnerS; and becoming major con­ In real and symbolic tenns, tion utilities in developing countries tributors to the clean-up of the the challenge of the Baltic Sea is a and in the formerly socialist econo­ Baltic Sea. microcosm of the challenge facing mies. The main function of the the interdependent world of the Partnership is to provide decision Utilities: Vttal 1990s: in real tenns, it is only makers involved in refonn efforts EnvironmentalActors through joint action by the nine with concise, up-to-date, practical in the Baltic Sea countries bordemg the Baltic that information on refonn options and The Baltic Sea is a unique the quality of this regional environ­ experiences. Utllities Parblership and vulnerable environmental re­ mental commons can be restored; Report #1 covers an international source. It is the largest body of and in symbolic tenns, the sea is meeting held in Brussels at which brackish water in theworld, shared ringed by interdependent countries the strategy for the Partnership was by nine countries, with 16 million ranging from some of the richest in defined. Report #2 provides details people living on the coast and 80 the world to others faced with cata­ of an international workshop con­ million in the catchment area. strophic economic declines and the vened at the request of the Govem­ Becausethe saltwater inflows from daunting task of economic trans­ ment of Peru, with a specific focus the North Sea are infrequent; the formation and development. on experiences with private sector Sea has many of the characteris­ This unique set of participation in the provision of ur­ tics of an inland water body and environmental, economic, and ban water and sanitation services, has suffered a fate similar to that of poHtica1circwnstancesgave rise the and the implications for utility re­ many lakes - increases in nitro­ BalticSea Declaration of 1990 and fonn in Uma, Peru. gen and phosphorus inputs and a high level Task Force of the This issue reports on an concentrations, decreases in dis­ Helsinki Commission to prepare a intemational workshop on utility solved oxygen and widespread eu­ Baltic Sea Joint Comprehensive Environmental Action Program. actor in the Helsinki Commission) long time. To cite just one ex­ The preliminary report of the Task requested the Utilities Partnership ample, Riga has one of the oldest Force showed both the immensity to convene a meeting on utility continuous urban water supplies in of the task, with estimated invest­ reform in the context of the Baltic Europe, with service dating back to ments amounting to over $20 bil­ Sea Environmental Program with 16201 The second is a high level of lion, and the primacy of municipal the specific objective of producing coverage, with water supply virtu­ and industrial wastewater (which consensus on a strategy for this ally universal and typically more accounted for about half of the vital sector for the interministerial than 70% of urban dwellers having total cost) in the required environ­ meeting on financing of the Baltic sewerage services. The third and mental action. Sea Initiative, to be held in Glansk, most important is a well-educated, At the time of the Baltic Poland, in March of 1993. skilled population, with a largenum­ Sea Declaration it was implicitly ber of competent and dedicated assumed that the developed ripar­ The Riga Workshop: engineers and technicians. ian countries would foot most of Participants and The utilities also start on a the bill for the clean-up. As the Program reform process with some difficult preparatory work advanced, how­ A two-day meeting, orga­ conditions. From a technical point ever, it became clear that the initial nized by the Utilities Partnership, of view, much of the Soviet-era conception - of huge investments and hosted by the Latvian Environ­ technology is outdated and highly financed by the rich countries ­ mental Protection Committee, was inefficient. Representatives from was neither realistic nor appropri­ held in Riga in February 1993. The Vllniuspointedouttbatenergycosts ate. It was not realistic both be­ meeting was attended by about 70 now account for about 60% of the cause the bill was so large in abso­ people, including representatives costs of operating their services, lute terms, and because the devel­ from utilities and local and national and that the new Vilnius wastewa­ oped economies of the region faced governments from Estonia, Latvia, ter treatment plant was such a high a host of serious domestic eco­ Uthuania, Poland, and Russia, and consumer of energy that it would nomic problems. And it was not representatives from water utilities actually pay the city to demolish it appropriate because the problem in western European countries, in­ and construct a new, efficlentplant! was not simply construction of fa­ temational professional associa­ The infrastructure for operation of ci1ities, but building a sustainable tions, and bilateral and multilateral a commercial system is also very institutional basis for environmen­ financing agencies. poor - few users are metered (and tal improvement in the formerly per capita water consumption is socialist countries. The task gradu­ The state of water accordingly much higher than in ally changed, therefore, to one of utilities in the ­ Western Europe, despite the ab­ identifying how to develop sustain­ formerly socialist senceofwater-using household ap­ able environmental institutions and countries around the pliances). of identifying high-priority, least- Baltic Sea From a financial point of cost investments. The water and sewerage view the current situation is The water and sewerage utilities of the five formerly socialist unsustainable. Water tariffs are very utilities of the poor Baltic countries countries bordering the Baltic Sea low (about $0.10 per cubic meter, pose a tremendous challenge, and have some formidable assets. The compared. with $2.50 in onethat is central to the clean-up of first is a confidence borne from a Stockholm, for example). Billing the Baltic Sea. For this reason the history of surmounting challenges procedures are archaic {a single, Nordic Investment Bank {a lead and supplying services for a very undifferentiated bill for all munici­ 2 pal services). And as the economic the case until the water stops com­ term ones will require new commu­ downturn goes deeper, only about ing out of the tap (a situation which nication skills: they will have to halfof households actually pay their may well be imminent in a number communicate more effectively with utility bills. In the past, utilities were of cities). politicians and with the public. This able to function financially by pay­ will require that managers, espe­ ing subsidized rates for inputs (with Challenges facing the cially, gain the skills and attitudes energy especlally important) and by water utilities helpful to public dialogues. Hold­ obliging industries to pay high wa­ Much of the discussion in ing public confidence in the water ter rates. This distorted tariff struc­ Riga focused on three related chal­ utilities now and in the future de­ turewill not (and should not) survive lenges faced by the utilities of the pends largely on building up wide­ the overall economic restructuring. region. The most immediate and spread understanding of the im­ In addition, the collapse of industry short-term is to ensure, one way or portance of the services, and of the has meant major declines in this another, that services continue to reform efforts being undertaken. source of revenue, t,oo. Fmally, function. The second is, over the Pa~icipants from devel­ transfers from central governments next decade and beyond, to trans­ oped countries and international to the water utilities, too, have form the utllities into efficient, ac­ professional associations stressed either been eliminated altogether countable, sustainable enterprises. that an essential part of this com­ or drastically reduced. The third is to help them become munication will be the articulation The utilities also face ma­ majorcontn"butors not to the pollu­ of a vision of the utility in the jor human resource problems. As tion of the Baltic Sea, but to im­ medium term. SpecificaDy, itwill be described above, there are excel­ provement in the quality of the sea necessary to convince politicians lent technical staff, but there are and the rivers that flow into it. and planners that this is not a large numbers of employees who bottomless pit into which scarce are now, or soon will be redundant Challenge 1: public funds will have to be poured (those who provide social services Maintaining services endlessly. The plea for the re­ for employees, and those who had ThefirstchaDenge- keep­ sources required to keep the utility to deal with the byzantine Soviet functioning in the short term must ing services going - is implicit in logistic system). And there are the description in the previous sec­ be accompanied by a credible plan severe shortages of the financial, tion. At the Riga meeting it was for phasing out such transfers in accounting, financial, customer re­ evident that some utility managers the medium term. A similar strate­ Jationsand managementskiUs which see this primarily as a simple finan­ gic approach will be necessary in are central to the functioning of a cial matter - of government pro­ arranging bridge financing from modern utility. ­ viding .the resources that they al­ external agencies. A final difficulty facing most ways have for operation of the of the utllities is that, daunting as water and sewerage systems. In Challenge 2: they are, their problems do not the discussions it became clear that The transition to modem command a high level ofconcern in there is a deeper challenge. Water utilities societies grappling with a host of utllity managers in the region and The Riga participants were more immediate, more obviousand elsewhere have a long tradition of unanimous that the major medium­ even more overwhelming restruc­ silent service. To surmount the term transition challenge is trans­ turing problems. This is likely to be immediate challenge and (as dis­ formation of the utilities into enter­ cussed later) confront the longer­ prises capable of achieving and 3 sustaining coherent and largely self- solution that involves simply hand- central government. Reform in­ sufficient management of the wa­ ing over the problem to someone volved the development of a legal ter supply and sewerage service as else to solve. More specifically, ef­ and regulatory framework for en­ an efficient business which its cus­ fective use of external consultants couraging the participation of the tomers come to see as offering fair will require large corresponding private sector, competitive bidding tariffs and good value. In short, to inputs from local government and among private operators for a 10­ transformthemselvesalongthelines utilities, especially in the vital areas year lease (affermage) for opera­ of "modem" utilities in developed· of organization, finance, commer­ tion of the system, and a gradual (and some developing) countries. cial practices, etc., where the objec­ program supported by a develop- Because they are not the tive is not just new methods but a ment bank for phasing in a reallstic first to undertake such reforms, the commitment to change by the ex­ tariff system (and a phasing out of utilities of the region have much to isting staff who come to cOntribute subsidies) over an 8-year period. learn from the experience of others toit. ' . In contrast to the presen­ who have undertaken such reforms A third message from the tation fro!'l the West European before them. Presentations were discussions at Riga concerned the utility, this example was deemed made on reform efforts in other sources of information available to highly pertinent by the participants. countries, and from these several governments and utility managers What was striking was that this conclusions of particular impor­ on the lessons ofexperience. There lesson was from West Africa, illus­ tance to the fonnerly socialist coun­ were surprises: obvious sources trating the point that there are tries emerged. turned out to be of only marginal lessons to be learned from places The first message from the value, while other apparently un­ which would not immediately seem discussions was the importance of likely sources turned out to be rich relevant. new legislation in some of the states with impUcations for the countries This raised a broader point toenablethewaterutilitiestomake involved in these reforms. To be of considerable interest. Thecoun­ more confidently and coherently more specific, one presentation was tries of the region (naturally) see the changes they have to make in made by one of the world's best-run their development objective as one the long transition ahead of them. utilities from one of the rich Baltic of emulating the success of their Particularly critical issues relate to Sea countries. Impressive and in- Western European nations, and the laws needed for investor confi­ novative as the experience of this they therefore look to the deveI­ dence, those relating to the setting utility has been, its current chal­ oped market economies for advise. of tariffs, and those ensuring that lenges were so far removed from The above example illustrates that, managers are given scope for mak­ those facing the former socialist in many instances, the formerly ing critical personnel and other states that the participants did not socialist economies have much management decisions. find much to learn of immediate more to learn from reform efforts The second message is that appUcability. At the otherextreme, in developing countries. More spe­ reform is never a simple or a quick one presentation discussed an on­ cifically, the water utility reform process. In most countries, prepa­ going reform effort where previ­ effortsofEastemEuropehavemuch ration for major private sector in­ ously tariffs were less than 10% of in common with similar efforts be­ volvementhas taken about five years the cost of water, the metering and ing undertaken in Latin America, of intensive work. Riga partici­ billing system was in total disarray Africa, and Asia. pants with experience inmajorre­ with less than 10% of bills even In the samevein, the meet­ form efforts also stressed that there collected, and the utility functioned ing revealed the wide variety of is no "magic bullet": there is no only with large subsidies from the reform paths being undertaken by 4 · ... the fIVe fonnerly commwlist coun­ concrete eXamples - such as the this is a relatively new challenge in tries represented at Riga. For ex­ Riga Workshop itself - where co­ many countries, and one which is a ample, discussions are under way operation was clearly to the benefit big and ongoing struggle in most for concession contracts with of aD. developed countries. For instance, French private sector finns in St. the Adriatic Sea is stU! severely Petersburg, Gdansk and Vilnius.Challenge 3: poDuted near resorts and the pros­ Effecting the environmental Riga isre1ying heavily on a twinning perous regions of Italy, and Brus­ arrangement with the Stockholm tranSition sels is stU! building its first sewage Water Company, while in Estonia treatment works. More generally, As noted earlier, about discussions are underway with an 50% of the estimated cost of the even rich countries are finding the Estonian-American businessman Baltic Sea clean-up is directly asso­ adaptation to new environmental for operation of the Eesti Wesi ciated with utilities. The single protection standards a major finan­ water supply authority. The par­ cialand institutional challenge. This loudest and cleMest message from ticipants noted the importance of: Riga - see "The Riga Statement" is a ~ge in which the utility (i) having access to disinterested, managers in the fonneriy socialist in Box 1 - was that utilities could third party advice, (6) the facility states need not be alone, but can play this vital environmental role if which the bilateral and multilateral and only if the utility modernization work together with their counter­ lending agencies offered in this process develops weD. Once this parts in more developed countries. respect, and (iii) putting in place The representatives of the modernization takes hold, the utili­ mechanisms such as the Utilities ties can substantially reduce poDu­ richer countries at Riga did, how­ Partnership for monitoring the ex­ tion in the Baltic Sea and the rivers ever, have several messages on perience of different countries, for flowing into it; water consumption environmental improvement. The digesting the lessons ofexperience , could be reduced; there would be first lesson is that in developed and for creating forums such as the incentives for conservation, better countries the problem had often Riga Workshop for feeding back been inappropriately framed ­ operation and plaintenance; and those lessons in a practical, timely there would be an accountabUity to setting standards, detennining how fashion. the population which had not pre­ this was to be done, and then FinaDy, participants from viously existed. expecting the resources to be forth­ other countries noted the impor­ coming. This fonnulation is now The Riga participants also tance of self-help. This ranges stressed that reducing municipal gMng way to a different approach from regional associations serving and industrial discharges into the that focuses on three issues: (i) smaller utilities (Eesti West, a water Baltic Sea is not a one-time invest­ determining the most efficient utility serving more than 40 smaDer ment problem, but a very repetitive means for achieving environmen­ municipalities in Estonia, is a par­ business that can be carried out tal goals, (ii) detennining the costs ticularly interesting example), to only by well-managed, sustainable involved in meeting different envi­ regional associations such as the institutions. ronmental goals, and (iii) submit­ League of Baltic Cities. On the Beyond institutional viabil­ ting to the public and the political other hand, reference was made to ity, however, the discussions at process this information so that the decades of "involuntary volun­ Riga made clear that utility manag­ decisions on environmental quality teering," and the strong legacy of ers will have to learn to live with the and the cost of achieving it can be suspicion in the region regarding new environmental concerns, and made together. voluntary associations. What was leam to become a productive part In this context the presen­ needed was not grand plans but of their solution. It was noted that tation on the Polish experience was 5 of great interest to participants. Riga Statement in the Gdansk Con- making the transition to modern, Poland has established an overall ference.) efficient, autonomouS, largely self- water resource management sys­ The role of the Riga State- financed enterprises that respond tem modeled on the French river­ ment in the Gdansk Conference is to and interact with consumers more basin system. A central feature of summarized in the words ofa major effectively; and becoming positive a French river-basin agency is the participant: "The Riga Statement agents for environmental improve­ "water parliament" where environ- was of transcendent importance ment. mental targets and levels of invest- because it showed that what. was Perhaps the most impor­ ment are set and highest-priority, needed was not just thrOwing money tant broad message to come out of least-cost investments identified. at problems, but an alternative the Riga Workshop is that this is a Participants agreed that monitor- which would develop sustainable "win-win" situation in which poli­ ing of Poland's experience and its institutions and make effident use cies designed to improve economic lessons is a high priority for the of limited resources. The Riga performance and standards of liv- region as a whole. Statement gave a practical, realis- ing are not.only consistent with, but tic, feasible focus for external sup- necessary for, environmental im­ The Riga Statement port agencies (in support of feasi- provement. In the words of one and the Gdansk bUitystudies and capacity building). participant at Riga "as we Conference And it gave a common framework strengthen our utilities to serve The impetus behind the forlocal and national governments consumers better, we will enable Riga Workshop was a need to de- and external agencies to work to- them to clean up the Baltic Sea. " velop a consensus among the coun- gether with common purpose." At tries in the region and their external the insistence of the ministers at- partners on: (0 the importance of tending the Gdansk Conference, utilities as environmental actors in the Riga Statement will be featured the Baltic Sea and (ii) the key tran- prominently and in full in the Gdansk sition tasks facing water and sewer- Report (currently under prepara­ age utilities in the formerly socialist tion by the Helsinki Committee countries. Accordingly, a focus of Task Force). the workshop was developing con­ sensus around ."The Riga State­ Prologue: ment, " which was designed to trans­ Realism and mit the messages from Riga to the challenges intenninisterial meeting on the Bal- The Riga Workshop be­ tic Sea Environmental Action Pro­ gan with bold, well-defined objec­ gram scheduled for Gdansk in late tives: better service to water users March 1993. The Riga Statement and utilities, contributing to im­ is presented in the Box on the provementsin the Baltic Sea clean- opposite page. up program. But it moved quickly (This report on the Riga to the hard realities of the transi­ Workshop has, however, been pur- tion: the central and urgent chal­ posely delayed so that it could con- lenge of keeping services operating tain a postscript on the fate of the under immediate economic stress; 6 . I THE RIGA STATEMENT ON WATER AND WASTEWATER AND THE BALTIC SEA ENVIRONMENTAL PROGRAM PtmAMBLE Under the auspices of the UNDP Water Utilities Partnership, a group of seventy professionals met in Riga, Latvia, 15-17 February 1993. The professionals included government, mWlidpaJ and utility officials from Estonia, Latvia, Uthuania, Poland, and Russia; officials from governments and water utilities in the Nordic countries; offiCials from regional and multilateral development banks and the UNDP; and representatives of the major international water and sewerage professional associations. The meeting analyzed the economic and environmental conditions in the water and sewerage sector in the Central and Eastern European countries bordenng on the Baltic Sea and was briefed on the status of the Baltic Sea Environmental Program and the involvement of the bilateral and multilateral financing agencies in the program. The attendees at the meeting reached broad consensus on the critical issues facing the countries' water and sewerage sector. Accordingly, the participants decided to transmit, in their individual capacities, "The Riga Statement" to be considered at the Diplomatic Conference on Resource Mobilization of the Baltic Sea Environmental Program in Gdansk on 24-25 March 1993. CONSIDERATIONS On water and wastewater utilities (1) The municipaJities and water and wastewater utilities of the Eastern European COWltries bordering the Baltic Sea face a histOric task. They are simultaneously attempting two difficult . transitions. The first is to develop from poor-quality, high-cost service prOviders, to the high-quality, least-cost perfonnance which characterizes modem water and sewerage utilities. The second transition is to make water and sewerage services a positive force for reducing the discharge of municipaJ and industrial pollution. . (2) Municipalities and waterutUities havemade remarkable efforts to simultaneously keep these vital services functioning and to effect these two transitions. Nevertheless, many of the systems are in a precariOUS state, and the health of the population seriously threatened. These efforts will have to be sustained in the face of difficulties and can only be done with the active support of citizens and governments. (3) There was Wlanimous agreement in Riga that the first transition -to customer-oriented, efficient services - is a necessary condition if the second transition - to greater respect for the environment - is to be made. Strengthening of the institutional and financial perfonnance of utilities is, accordingly, vital if sustained improvernen~ are to be made in the condition of the Baltic Sea. On investments in wastewater management (4) The need and urgency to make improvements creates a tendency to regard any wastewater treatment project as a good thing. But the ad hoc financing of indMdual wastewater treatment plants taken up in isolation can be inappropriate and a poor use of resources. The participants noted the potentially high payoffs from investments in water consetvation (including metering), the rapidly changing composition of indusby and the high opportunity cost of limited resources. The participants 7 therefore agree that attention should be given to the likely evolution of domestic and industria1 water demand, and to identifying a phased, least-cost, high-priority investment program. RESoumONS The Riga participants therefore urge that the following three recommendations be considered at the Gdansk Conference. Resolution 1, regarding the development 0/ water and wastewater utilities High priority should be given by national governments and external support agencies to supporting the remarkable efforts of municipalities in Estonia, Latvia, Uthuania, Poland, and Russia to foster the development of autonomous, self-financed water and sewerage utilities which provide good service efficiently to their populations. Critical elements in this reform program include: new legislation enabling this process to go forward strongly and widely; intensive human resource development and capacity bullding programs, especially in the areas of financing and management; the phasing in of more appropriate tariff systems, With particular attention being given to closing, over a period of several years, the wide gap between current domestic tariffs and the cost of services; and least-cost investment programs focusing on rehabilitation, demand management, and commercializa­ tion. Resolution 2, regarding investments in environmental improvement Priority should be given to the use of grant financing to conduct comprehensive feasibility studies to identify a medium-term package of high-priority investments. Isolated investments in wastewater treatment facilities should be avoided. This would both ensure that the best use is made of limited resources, and increase the possibility of obtaining financing by intemational financial institutions. This could initiate a sustained improvement in the quality of the Baltic Sea. Resolution 3, regarding mechanisms Addressing these challenges will require a disciplined, sustained partnership involving municipalities and utilities, national governments, bilateral and multilateral financing agencies, professional associations, and the private sector. The Gdansk meeting should consider mechanisms for strengthening existing partnership arrangements (such as the Union of Baltic Oties) and fostering and facilitating the other forms of partnership that are needed. This Is the third of a series of reports Issued by the Utilities Partnership. They are Intended to be a ftexlble and varied means for dlssemln~ng practJ. For further infonnation: cal and timely Information. Some reports will be more Journalistic In style and tone. Others will be more detailed, technical reports on spedftc Issues. Water & Sanitation Under preparatIon.. for example, are papers on the Division (TWUWS) recently awarded concession for \II&S In Buenos The World Bank Aires, the public-private partnership for \II&S In Paris, and a regUlatory and Institutional framework 1818 H Street Nw for ImprovIng water and sewerage services. Washington, DC 20433 USA 8