Executive Summary

This report analyzes the progress and challenges of 16 countries in the Danube River basin1 in delivering sustainable water and wastewater services to all, including meeting the European Union (EU) environmental acquis communautaire, since a first State of the Sector (SoS) report was published in 2015. The State of the Sector report 2015 (SoS 2015) describes in detail the historical and political context and the organization of services

in the Danube region, as well the specific background in each country in individual country notes, whereas this State of the Sector report 2018 update (SoS 2018) focuses on presenting the progress made by the different countries and at regional level, and understanding the emerging trends in the four dimensions that comprise the Sector Sustainability Assessment (WASCO)2. These four dimensions are: the level of access to water supply and sanitation (WSS) services, the quality of services provided (and customer satisfaction with it), the performance and efficiency of service providers, and the financing of services. The report zooms into some of the WASCO dimensions to identify three cross-cutting key agendas for the sector’s future in the development region; the “last mile delivery” for water supply; the sanitation and wastewater management agenda, with social inclusion aspects and EU compliance in the background, and potential for more benefits with the use of “from-waste-to-resource” and “watershed approaches”; and the operational improvements and utility efficiency agenda. The report includes a separate chapter on water resources management and climate change, given the growing relevance of the topic for the countries in the region and at the global level, with climate change showing itself on the planet mostly through its effects on water cycles. On this critical area, the report focuses on identifying areas for attention as well as knowledge gaps where more information would be needed for countries to properly manage water resources and water-related risks in this changing context. The report concludes with a call-for-action for countries to further invest in developing policies, people, and partnerships, aided by faster-than-ever developing technology, to make these agendas move forward for a more water secure Danube region and more inclusive, reliable and resilient water and sanitation and wastewater management services.

Water Resources and Climate Change

The Danube River basin is the second-largest river basin in Europe and one of the most international rivers of the world, covering more than 800,000 square kilometers (km2), with a total population of more than 133 million people in 19 countries, a diverse landscape, and significant differences in water resources quality, quantity, and climate throughout the basin. The Danube connects with 27 large and more than 300 small tributary water flows, from its spring in the Black Forest in Germany to the Black Sea in Romania and, as such, is the largest water basin in the EU.

The availability of renewable water resources within the Danube basin has remained stable overall for the past few years, with no country considered water scarce except the Czech Republic and some countries (Ukraine, Moldova) approaching physical water scarcity3. In terms of quality, since 2009, the surface water bodies in the Danube region reaching good ecological or potential good status and good chemical status4 have continued to improve, thanks to instruments like the Water Framework Directive, the related Danube River Basin Management Plan and improvement in data and information quality and availability (significantly improved even from the date of the original SoS 2015). However, water bodies in the Danube River basin continue to include an excess of organic matter and highsignificant levels of nutrients, particularly affecting groundwater bodies of basin wide importance. For most countries in the region, groundwater remains the major source for drinking water production.

From a perspective of water resource management, the EU water legislation is a powerful driver for candidate and potential candidate countries to harmonize their water policies. Water management in the basin is driven by the principles of the EU Water Framework Directive (WFD) internationally coordinated via the International Commission for the Protection of the Danube River (ICPDR). Nowadays, 15 out of 16 countries in the region are following the WFD principles, have established basin management authorities, and are preparing River Basin Management Plans (RBMP), compared to 11 countries in 2015. In almost all countries of the region, water extraction rights and wastewater discharge permits are being used to collect resources and are systematically charged and paid (compared to three years ago).

From 2021 to 2050, an increase in annual mean temperature between 1.3 °C in the upper and middle parts of the Danube River basin and up to 1.7 °C in the lower parts are projected, and further increases between 4 °C and 5 °C are projected for 2071 to 2100, based ondata collected by the ICPDR. Not to mention the transformation that almost all sectors will need to undergo if the region wants to stay only at 1.3°C warmer, with regards to water an increased temperature will imply overall precipitation changes with uneven (and to a degree, uncertain) consequences in the different countries. Even if the mean annual precipitation were expected to remain almost constant overall, the changes in temperature and precipitation would likely cause a reduction in water availability with changes in the seasonal runoff pattern, mainly triggered by reduced snow storage and strong seasonality of precipitation. In addition to the climate change measures included in RBMPs, most countries in the region have adopted national climate change strategies; however, the specific impact of these strategies in the water supply and wastewater sector have yet to be defined and implemented. Most WSS utilities still need to integrate climate considerations and in their regular planning.

To better manage the resource and adapt to and mitigate climate change impact, countries in the basin will have to start producing accurate water balances at the appropriate spatial and temporal scales, considering current and future demands from different users and sectors of economy, development trajectories, ecological needs, and climate projections, among others, to guide water policy making and serve the best outcomes for society, the environment, and the economy in the entire territory of the region.

Context and Organization of Services

Many of the countries in the Danube River catchment area share a common historical trajectory marked by the political and economic transition from a centralized government and socialist economy to a social liberalism model endorsing a regulated free market economy and the expansion of civil and political rights. The EU integration agenda is the other common more recent historical and political process present in almost all the countries of the region. Major political and cultural differences among the countries exist, but overall, there is a convergence toward European standards occurring. However, differences in gross domestic product (GDP) per capita are still significant across the countries within the Danube watershed, and about 2.5 million people within the Danube region live on less than $2.50 a day (purchasing power parity [PPP]), which represents a slight increase in measured poverty since SoS 2015.

There is a continued declining trend of population (from 135.2 million in 2015 to 133.7 million in 2018) within the Danube, due to a combination of low natural population growth and outward migration in some countries, particularly from recent EU members or candidate countries, where young talent is looking to the EU and beyond in search for better economic prospects. This continues to be a concern for many countries in the region which are trying to move forward in the jobs and growth agenda. At the same time, the region is experiencing incoming migration from citizens fleeing from conflict in their countries. High volume of internal (and external) migration flows and seasonability will also affect infrastructure planning. Everywhere in the region there are true jewels of nature and culture with great potential for eco-friendly and sustainable tourism, as well as emerging and consolidated tourist centers and which see their populations multiply by as many as 10-fold during specific times of the year, which poses a challenge for the design on water supply and wastewater management systems and infrastructure.

Accession to the EU by seven of the Danube region’s countries in the first decade of the twenty-first century has driven much of the remarkable development in the water sector in the different countries. The key drivers have been financing (with significant grant funding from the EU’s structural cohesion funds targeting the achievement of compliance with EU water-related directives) and the alignment of national legislation to EU directives (through introduction of key policy principles such as cost recovery, polluter-pays, efficiency of use, and quality and environmental sustainability of water and water bodies). However, many recent EU member countries are struggling to reach compliance within the periods for harmonization agreed upon during the negotiations of chapter 27 on environment (including water) during the EU accession process, reflecting that these may have been overambitious or may not have sufficiently considered the many challenges posed by underdeveloped institutional and technical capacities, governance models, and poorly maintained and insufficient infrastructure.

In the six EU candidate or potential candidate countries in the region, the EU pre-accession process has also significantly fostered water sector development and financing, with the countries accessing grant pre-accession funds (Instrument for Pre-Accession [IPA]) and allocating them to financing infrastructure investments in the water and sanitation sector. The prospect of EU membership is also influencing sector planning and future development of WSS services. For the two countries in Eastern Europe within the catchment area (Moldova and Ukraine), the EU WFD is also a reference; however, the influence of the future accession process, both in terms of current financing and penetration of policy principles, is less significant. The water sector overall in the countries in the region has also been affected by territorial and administrative reform processes, institutional reorganizations, establishment of new sector policy and regulatory entities, and national/subnational governance frameworks driven by the individual country political and social realities, as well as other bilateral and international relations coexisting with the prospect of EU accession.

The proportion of the population receiving public water supply (that is, from a formal service provider) has increased to 82 percent — an 8 percent increase compared to the situation three years ago — which reflects a regional trend toward expansion of formal services and regionalization. As a result, fewer people are relying on self-provision or informal providers. The proportion of people served by private service providers has also increased, with public-private partnership (PPP) contracts signed and in force for WSS service provision in seven countries of the region. In rural areas, water services are normally organized through a nearby utility, community-based organizations, or self-provision. Going forward, it will be important for countries to develop policies which contemplate a menu of options of delivery models which can ensure safe and adequate delivery of services to move forward in the access agenda.

Several countries in the region have considered aggregation to improve efficiency and performance and to extend coverage to rural areas, with various level of success and mixed results. Successful regionalization processes to integrate rural areas were characterized by a deliberate equity objective and a clear mandate, dedicated measures to support integration of rural systems, and targeted investments and technical assistance to local governments and service providers to handle complexity. In order to successfully reach rural areas, multiple management models may need support, including the regional utility model, but also the small-scale municipal enterprises or community organized models, as well as those relying on self-supply.

Different models of economic regulation continue to coexist for water and sanitation services in the Danube region, but there is a trend toward increased central level regulation, with Macedonia and Montenegro adding water sector competencies to their national energy regulatory agencies in 2016. The number of water specific regulators has also increased from three to six between 2015 and 2018, but they vary greatly in their effectiveness and independence.

Efforts to track utility performance and benchmark it against their peers and international good practices are increasing, with several regulatory agencies and utility associations using different data collection management systems (including the utility based three-tier platform DANUBIS DCM developed by the DWP), more than 50 utilities participating in the Danube Learning Partnership’s Utility Benchmarking Program, and in multiple other performance monitoring and improvement tools, and many of these stakeholders (as well as individual utilities throughout the ECA region) sharing data with the publicly available Ib-net of the World Bank and DANUBIS.org website, which shows an increased transparency approach.

Access to Services

In 2015, countries at the global level adopted the 2030 Agenda for Sustainable Development, which sets new definitions and targets for achieving better (that is, universal, equitable, safe, and affordable) and more sustainable water and sanitation services. According to these new indicators, half of the countries in the region provide at least 90 percent of their inhabitants with safely managed drinking water services5, while only five countries in the region are reported to provide more than 75 percent of their population with safely managed sanitation services (three countries provide safely managed sanitation to less than 25 percent of their population).

Access to piped water supply and sewerage services has generally increased in the period; about 17 percent of the population in the region (more than 22 million people) still lacks access to piped water supply since the last SoS review. Overall, lack of proper access is prevalent in rural or less densely populated settlements, which are often not prioritized in political agendas and typically lack the economies of scale to cost-effectively provide network services through piped network infrastructure. Even more than piped water supply, access to safely managed sanitation is lagging. Lack of adequate sanitation services is also most prevalent in rural areas or areas with low population density, and about 5.5 million people, or 4 percent of the region’s population, have access to only unimproved sanitation service6. Most of the population with unimproved sanitation is in rural areas, and two-thirds are in Romania.

The share of population connected to wastewater treatment has evolved differently across the Danube region, and remains an underinvested agenda in candidate and non-EU countries. Some EU member states (Czech Republic, Hungary, and Bulgaria) have managed to increase the connection to more than 70 percent with two-thirds of the connected population receiving tertiary treatment. Other EU member countries are lagging (e.g. Romania), or their wastewater connection rate has stagnated over the past five years (e.g. Slovenia and Croatia). In candidate countries, little progress has been made as wastewater is predominantly collected without being treated, except for Albania, and some developments in BiH. The main challenges include funding constrains and weak capacities, which results in capacity investment needs exceeding available funds, difficulties with maintaining and operating existing wastewater systems, high financial costs possibly beyond the affordable, and (lack of) availability of funds for renewal of infrastructure.

Increasing access to the three services (water, sanitation and wastewater management/collection and treatment) remains a challenge for all the countries in the region, especially in less densely populated areas. Closing the rural-urban services gap is still an important challenge that will require countries to elaborate specific strategies to expand services to rural areas and work on the enabling environment to recognize and support the different service delivery models available to address specific needs of rural areas (including self-supply mechanisms), while looking at the opportunities offered by thriving technology (particularly in sanitation regarding decentralized and on-site systems) and innovative financing mechanisms (involving the private sector). Although regional and urban utilities may be able to reach a substantial share of the rural population, in some countries, parallel local operator models might continue to bring services to villagers. In addition, for dispersed and remote populations, though shrinking in size, a piped public water supply networked system may not be feasible and self-supply is the only viable alternative, whereas decentralized off-network systems (or on-site solutions with regulated emptying) might be the most appropriate model for wastewater, particularly looking at nature-based solutions which may generate additional benefits contributing to a circular economy model.

Performance of Services

Overall, service quality, in terms of continuity and compliance with water quality standards (in those instances where water quality is being monitored) and wastewater discharge standards has improved in the region since the 2015 review.

Overall, a greater share of the population in the region now receives continuous 24/7 service compared to three years ago, though at the individual level, continuity has deteriorated or stalled in some countries. Metering of consumption has also increased at the regional level, which seems to be proving successful as a demand management tool, with consumption decreasing significantly in seven of the countries under study, though higher tariffs in those countries might have also played a role in bringing down average consumption. Customer satisfaction has remained stable or improved generally and, counter-intuitively, seems to be higher in rural areas even though service levels are not necessarily better in these areas, which shows there might be benefits in supporting the self-supply model in some cases with adequate oversight. There has been little progress, however, on improving customer protection mechanisms.

With regard to the efficiency of service providers, there are also positive trends. Nonrevenue water (NRW) has followed quite a diverse evolution across the region over the past few years, with half of the Danube countries making improvements in the reported NRW figures or keeping it stable and the other half reporting increases in NRW. More data is needed to draw conclusions on service providers’/countries’ performance regarding energy efficiency; however, the analysis shows a decrease in energy costs per cubic meter (m3) of water produced, which could point to more efficient energy use though it is likely that the cost reductions are driven by reducing energy costs. Staff efficiency has been maintained or improved, with five countries improving their staff productivity since the original SoS 2015. The commercial efficiency of utilities in the region is generally solid and improving, with four new countries managing to improve their collection ratios above 90 percent since SoS 2015.

Utility performance in the Danube region has increased since 2013 as measured by the Water Utility Performance Index (WUPI7). Overall, the increase for all utilities under study was 4.2 points, accounting for the fact that the underlying sample of utilities has changed over the years. Albeit some diverging trends within countries, WUPI scores at the country level have all improved or remained stable in virtually all countries since the first SoS in 2015.

While positive trends are identified with regards to service provision quality and efficiency, also much room remains to continue to improve quality of services delivered to the entire population of the Danube basin and the operational and financial performance of service providers, and significant monetary savings could be generated by continuing to focus on policy actions for improved performance and on supporting improved cost-efficiency by service providers.

Financing of Services

Sector financing will have to be increased dramatically in non-EU countries for the region’s countries to converge to similar levels of spending in the sector (which in turn has a strong correlation with sector sustainability assessment). The level of sector financing varies widely and has followed different trends in each of the region’s countries in the last three years. Although average per capita financing has overall increased by 20 percent since the first SoS, this overall increase masks an enormous difference in the funding available for the sector between EU, candidate and non-EU countries (eight times less that of EU member states). Many of the low- and middle-income countries of the region (mostly the candidate and non-EU countries) are also in the lower range of the generally accepted value for overall sector financing as a share of GDP.

Although the cost recovery principle is gradually progressing in most countries, EU funds (grants) still represent a large source of funding in the region, especially for investments linked to the Urban Wastewater Treatment Directive (UWWTD) implementation. An important proportion of the UWWTD related investment costs have so far been covered by transfers from EU cohesion funds for new EU member states (which account for more than 40 percent of sector investment funding in some countries).

In about two-thirds of the countries, WSS direct operating costs are covered by revenues from tariffs. Three years ago, only half of the countries could reach an operating cost coverage above one. To maintain service quality in the long run, utilities will need be able to recover their O&M costs, as well as those necessary for asset management as well as the renewal of infrastructure. This will need to be funded from their own revenues (using appropriate financing schemes), or be supported by adequate tax allocations from public budgets.

Although tariffs have increased over the past decade, current levels are still affordable for the average consumer. Real tariffs have increased by 5 to 10 percent per year, on average, over the past decade, but so have disposable incomes among residents. Computing reported expenditure on water and wastewater as a share of income for different income groups reveals that the average expenditure is well below the 5 percent threshold, with the highest shares observed in Ukraine and Romania (4.4 and 4.2 percent respectively). Estimations of the expenditure share for the bottom 40 percent show a slight increase, but affordability constraints are prevalent only in Ukraine. However, the inclusion of full cost recovery tariffs (to reflect the cost of renewing the infrastructure in the future to maintain present service standards) might pose affordability challenges to a few of the countries in the region in the near future, depending on socio-economic groups. Only Croatia, Hungary, North Macedonia, Slovenia and Ukraine report having formal subsidy schemes to ensure affordability for low-income earners.

Conclusions

Overall, there are several reasons to be optimistic about the sector’s development in the region since the last SOS review. The proportion of the population receiving water supply by a formal utility service provider (as opposed to informal, locally managed cooperatives or self-provision) has notably increased; the quality of both the services and utility performance is showing positive trends in most countries; overall sector financing has increased and is flowing to the sector, albeit not at the required amounts; and cost recovery levels are generally increasing. The factors behind these heartening developments could be attributed to many drivers. Chief among them are the increased uptake of more evidence-based government policies and programs benefitting from strong leadership, significant investment in improved capacities at utility and institutional levels, improved knowledge and information systems, and technical and financial support from the EU and other development partners.

Despite this good news, two challenging – and important – agendas are highlighted in this report.

• First, the access to services agenda and ensuring “last-mile” delivery to reach universal access to the three services (water, sanitation and wastewater management/collection and treatment), particularly in rural areas. The “no-one left behind” agenda will include addressing remaining challenges in the context of increased standards by the SDGs on water, sanitation and hygiene (WASH). Access by the population to piped water supply is advancing at a very low rate. All too many people in the region’s rural areas still lack safe access to safe water supply. This poses equity issues and health risks for what is often the poorest or most vulnerable parts of the population. Poor water quality monitoring in the areas where low public and piped water access is prevalent threatens to further exacerbate this problem. Global and regional evidence point to an increasing recognition that self-supply will remain part of the service delivery mix to reach universal safely managed services, and proper support will need to be factored in. With regards to sanitation and wastewater management, overall low levels of access to improved sanitation and sewer-based wastewater collection in some countries, in rural areas particularly, mean that a fundamental shift of approach is needed to achieve quality of life and environmental goals. Here too, people are self-supplying through their own septic tanks/soakpits, while emptying services (or self-emptying), and also the correct installation of adequate technical solutions is largely unregulated. Delivery models will also need to reflect the different sanitation solutions, beyond sewerage (decentralized systems, on-site systems with regulated emptying, etc.), which are also recognized under the UWWTD (Individual Appropriate Sanitation). For wastewater treatment, exploring the potential for wastewater reuse and for shifting to a new paradigm of “from waste to resource”, has the potential to transform a burdensome problem into an opportunity for a circular economy model. Summing up, to advance in the access agenda, countries will need to: i) adopt a “portfolio approach” to water supply services, supporting multiple solutions for universal access, supporting self-supply schemes; ii) ramp-up sanitation investments in the rural areas, including household self-investments and individual solutions; and iii) adopt new technical, institutional and financing approaches to wastewater management.
• Secondly, WSS utilities are not always well run, performing satisfactorily nor operating on a financially viable basis – a pre-requisite if any of the above challenges are to be met, and good quality services provided to the citizens. Countries must focus their efforts on improvements in these areas if the progress achieved is not to be stalled – or, worse, reversed. Improved utility performance and efficiency will enable service providers to further improve financial viability and bring in the additional financing required to expand coverage and continue to sustain and improve service delivery. Hence, a longer-term approach is needed to create a virtuous cycle in those countries to focus on improving their utility financial viability and creditworthiness, through promoting efficiency improvements which will gradually reduce the needs for overall financing. Stronger financial sustainability will also improve the chances of attracting much-needed commercial financing towards the sector. Doing so will help not only help deliver the access and sustainability SDG agenda, but also reduce the burden on limited fiscal budgets.

The above agendas will need to be addressed against the backdrop of a changing social context and shifting population trends. Total population in the region is decreasing, and people are migrating both out of the region and within it in search for different opportunities. At the same time, inward migration towards the EU overall is increasing (in 2015 and 2016 alone, more than 1 million people entered the European region, mostly fleeing nearby conflict areas). Humanitarian and targeted social inclusion policies for service delivery will need to be further developed, not only to deal with migration aspects, but to address the great disparities in poverty levels – across socioeconomic and ethnic groups and across urban population centers and rural or more dispersed areas. These contrasts exist across most of the countries in the region and indeed is reflected in the level of access to the services by these groups. Seasonality should also to be factored-in for future WSS services sector development. This is because increasing tourism flows will be affecting the planning of WSS services in the future, and the appropriate dimensioning of systems and infrastructure is already an issue in many growing touristic towns across South and Eastern Europe.

Climate patterns are also changing, and increasingly warming temperatures are a reality. Building resilience (both in infrastructure and in institutions) to climate and water-related risks will become critical for countries to continue to effectively and efficiently deliver water and wastewater services. Improved data and knowledge, human talent and new technologies must all be harnessed to do this. Water policies will be required to be climate informed, and WSS utilities from the region – and their staff and management - will need to operate these services and plan for infrastructure development under conditions of higher uncertainty. They will have to learn to do water safety planning in line with their own spatial development and basin planning mechanisms and introduce the use of climate and water availability scenarios modelling to prioritize and execute investments considering the basin level context, under a water security approach.

Finally, stewarding the 21st century WSS sector for improved services in the regional context will require governments in the region to use evidence-based policies, invest in people, and foster partnerships. Government´s will be able to steer much of the sector’s development using “smart” policies that factor in the changing context and set the right incentives for key sector stakeholders to do their part. Digitalization of the water industry and new technology will likely continue to provide plenty of tools to improve practices and operations, which “strong” (and smart) utilities will be able to use depending on their specific business needs and priorities. But success will not be possible without investing in people. Skilled and motivated professionals will be needed and in high demand in the region in different fronts in the sector, including scientific investigation and technological innovation, policy making, regulation, utility management and technical operation of the services. At the same time, these professionals will be called to interact effectively amongst them and with other stakeholders at different levels, including regionally, nationally and between central and local levels of sector authorities, as well as with other agents in the basin - including basin authorities, service providers, farmers, industries, and citizens generally. Countries could use opportunities offered by different regional initiatives and platforms to further strengthen their policies and build the capacities of their people and sector professionals. Greater citizen engagement and stronger local, regional and international partnerships, public and private, can nurture and thrive in these strengthened capacities to expand the possibilities for progress and provide a path not only to more sustainable WSS services, but to increased water security for all in the region.