C. Cost Recovery: Cost and Tariff Trends
96. The costs of providing services vary widely from country to country but have grown significantly over the past 20 years, accompanied by parallel tariff increases. The chapters on access to services (Chapter IV) and utility performance (Chapter V) have demonstrated how the sector’s overall performance has improved, in terms of coverage and quality of services, in the past 20 years. The necessary investments, in particular for the extension of wastewater collection and treatment, have been matched by significant increases in overall operating expenses. Figure 56 shows the evolution of operating costs in a sample of water and sewerage utilities, with increases in many countries, particularly EU member countries. However, this increase has not continued at the same pace over the past years. Figure 57 shows that utilities have increased their revenues in a similar fashion, largely through tariff raises. Nevertheless, in the past three years, the increase in tariffs levels appear less pronounced.
97. Residential tariffs generally follow the level of economic development of countries, with highest levels observed in EU member countries. Over the past three years, the average water and wastewater tariff in the region has risen by 4 percent to reach €1.37/m3. Nevertheless, tariffs have followed a different trend in the region. In half of the countries, they have increased (in a range varying from 6 percent in Austria to 39 percent in Slovenia), thus inducing an improvement in cost recovery level. In the rest of the countries, tariffs have actually decreased (from 2 percent in Bulgaria to 33 percent in Hungary), where prices are under strict control. As Figure 58 shows, Austria clearly presents the highest tariffs, followed by all other EU members. In contrast, most countries of the Western Balkans have tariff levels far below the regional average, even though affordability is not generally a constraint. Overall, the average water and wastewater tariff remained stable at €2.13/m3 (- 0.51% compared to five years ago) in EU member states and in EU candidate countries with 0.60€/m3 (-0.4%) while it strongly decreased to reach 0.57€/m3 (-14%) in non-EU countries.
98. In two-thirds of the countries, revenues from tariffs exceed operating costs. Five years ago, only half of the countries could reach an operating cost coverage above 1. To maintain service quality in the long run, utilities should be able to recover their operating and regular maintenance costs, as well as those necessary for asset management and renewal, from their own revenues. Figure 59 displays the average operating cost coverage of utilities in the region, measured as the net billed sales over operating expenses, including depreciation; utilities should have an operating cost coverage above 1 to be financially self-sufficient in terms of O&M. As the figure shows, a majority of countries’ utilities recover all of their operating expenses from their own revenues. Among EU member countries, Hungary is the only one that does not appear to fully comply with EU requirement of cost recovery due to strong tariff control in place. The overall situation is not particularly positive, especially considering that utilities in a number of countries fail to collect a significant share of billed revenues (Figure 59) and may be even lower (provisions are seldom made for accounts receivable write-offs). The long-term trend regarding operating costs coverage evolution only shows slow and limited improvements (Figure 60).
Box 12 Sustainability of O&M Costs of WWTPs in Bosnia and Herzegovina
Access to public services in Bosnia and Herzegovina is about 60 percent for water supply and 32 percent for wastewater collection. During recent years, with significant financial support from the EU, several WWTPs (in Sarajevo, Bihać, Mostar, Bileća, Konjic, and Zivinice) have been constructed or reconstructed, increasing percentage of wastewater treatment from 3 percent to currently 20 percent. However, authorities face challenges in the post-completion phase of the project to maintain the achievements. For example: (a) low financial capacity because of low tariffs and substantial overall inefficiencies in the public water utility (PWU) operations and (b) low technical capacity, lack of qualified staff, and lack of interest from the authorities in improvement of the PWUs’ accountability through reforms. O&M of newly constructed WWTPs is under the responsibility of municipal PWUs, which have neither the adequate financial nor human resources to manage it. Although operation of the facilities has started, the tariff structure for services has not changed, directly endangering both wastewater treatment and water supply systems. Often, support to PWU to manage WWTPs is given on an ad hoc basis, mainly through financial subsidies from municipal or higher levels of government (Sarajevo WWTP). This situation is directly endangering investments, and PWUs are struggling to secure stable funding for WWTP operation. If practices do not change soon, some may stop working. Typical is the city of Mostar, in which the World Bank, an EU delegation, and the Swedish government have invested more than US$13 million in construction of the WWTP. Although all works were finished in June 2017, the facility is still not in operation (as of May 2018) due to lack of local financial and operational capacities to run the WWTP. This clearly shows that local communities and higher governmental intervention have failed to perform necessary assessment of affordability and operating costs of the WWTP and other capital investments before its implementation. Although Bosnia and Herzegovina is not an EU member state, its legal framework is being harmonized with the EU acquis (Drinking Water Directive [DWD] and UWWTD). However, the implementation is very weak, and the new legal and operational framework should be established to enable sustainable development and operation of WWTP investment. Findings of the World Bank Implementation Completion and Results (ICR) report, prepared for recently completed projects (Sarajevo Wastewater Project and Water Quality Protection Project), have identified issues characteristic for water utility operations and projects in Bosnia and Herzegovina and regionwide, including the following:
- The financial sustainability of the water utilities is often precarious, and efforts are needed to ensure that utility can fully cover their operating costs.
- Project objectives should be closely tailored to the capacity of the government and utility and the conditions of the enabling environment existing at the time of project preparation.
- Operation costs need to be properly calculated.
- Affordability of tariffs needs to be carefully assessed before the project.
- Authorities at various levels in government must secure upfront sustainability of investments and commitment to guarantee sustainable and efficient operations.
- Active measures for wastewater collection and users’ connection to sewers must exist as construction of wastewater treatment facilities are constructed.
- Implementing sectoral or tariff reforms needs to be joined with improvement of water and wastewater services for consumers to find tariff increases acceptable.