B. Remaining Challenges and Policy Implications

109. Despite the overall progress described in the previous section, this SoS 2018 report has also highlighted important challenges to sector sustainability, where stepped-up targeted policies and systems will be needed and bring the sector in this region to the standards of the SDG on water and to link it with a water security approach for the world of tomorrow. These are namely focused on: i) reaching universal access to safely and adequately managed water supply and wastewater/sanitation services, especially in rural areas (often home to the poor and more vulnerable), where access rates to the services are significantly lower; and ii) sustaining and continuing to improve utilities efficiency and performance (both operational and financial) to increase the overall funding and financing available for the sector and improve/maintain service quality levels, while addressing affordability issues for those segments of the population that need them. The research conducted by the World Bank with support from the DWP in the last three years suggests that countries will need to make policy adjustments to successfully address these remaining (and emerging) challenges. Below are some of the policy recommendations emanating from this research and from the present SoS 2018 review.

110. Policy recommendations for countries to address the access dimension include:

• Adopt a “portfolio approach” to water supply, supporting multiple solutions for universal access and “last mile” service delivery: Despite the progress highlighted in previous section, still about 17 percent of the population in the region (about 22 million people) is currently without access to piped water supply, with prevalence in rural or less densely populated settlements, where often the poorest population resides. Countries will need to work with different service delivery models, rather than one-size-fits-all, to reach different rural population groups, as various delivery models co-exist, including self-supply, and public service alone won’t get the countries to safe universal water services — nor to meeting any future requirements of the Drinking Water Directive (DWD) toward ensuring access by vulnerable and marginalized populations. Countries will need to develop policies, legislative frameworks, and financing measures that recognize and enable the variety of service models, and set up targeted investment programs for rural areas, as well as establish performance monitoring systems and oversight arrangements (with special attention to water quality).
• Foster rural sanitation investments, including household self-investments and individual solutions, leveraging on technology advances (on decentralized systems and on-site solutions) and innovative financing mechanisms (including supporting household investments and involving the private sector where possible): Access to safely managed sanitation and to public sewer systems by the population is still considerably low in a few countries, also particularly acute in rural and dispersed areas. Some of the countries in the region are indeed facing an enormous challenge in the rural sanitation agenda (Moldova, Ukraine, and Romania had only one in eight, one in four, and one in two households, respectively, use a flush toilet and citizens living in these areas are using outdoor pit latrines of doubtful hygienic status with limited comfort and often lacking nearby handwashing facilities). The main policy recommendations for countries are to: (a) develop special rural sanitation strategies based on providing guiding criteria for individual and appropriate systems (as opposed to sewerage network solutions for agglomerations with a population of fewer than 10,000 people), identifying relevant service delivery models across the service chain for different segments of the rural population and decoupling technology aspects from service levels, to facilitate the identification of sanitation solutions beyond centralized network based wastewater collection and treatment; and (b) accelerate self-investments through comprehensive rural sanitation programs in coordination with local governments and communities. Key elements in these programs are public outreach and communication for improved awareness and engagement (using sanitation marketing and behavior change techniques), and the development of local markets and conditions for affordable sanitation products, exploring ways to increase access to financing options for household self-investment (microcredits) and using targeted subsidies for the poorest.
• Take on board new technical, institutional and financing approaches to wastewater management: Almost all countries of the Danube River basin have witnessed improvements in the levels of wastewater treatment, particularly EU members, thanks to the drive of complying with the UWWTD (though most of the recent EU member states are falling behind implementation schedule), and the recent investments by candidate countries (supported by EU IPA and other funds) to develop wastewater treatment plants (though countries need to improve their technical and institutional capacity to adequately operate and maintain the infrastructure). The non-EU countries have stalled in terms of expanding the required infrastructure and will have to ramp up current investment levels for any further progress to take place. Candidate and non-EU countries are far from compliant with the UWWTD, and they face significantly lower economic development levels than EU member states, further constraining their ability to fund the needed investments. These countries will need to prepare strategic financing plans for wastewater infrastructure, and candidate countries will need to negotiate appropriate deadlines to implement the UWWTD, considering the sustainability and affordability of this costly piece of EU environmental legislation. The recent EU member states will also need to mobilize significant additional funds (from taxes, tariffs, or further transfers) to bridge the investment gap and remain compliant with the UWWTD going forward, while total cost recovery from tariffs of wastewater management costs remains a challenge in most countries. A total of €42.5 billion has been invested to date by the seven new EU member states of the Danube region since joining the EU, plus Austria, to implement the UWWTD. An additional €57 billion will be needed to reach and maintain full compliance until 2040. To continue with the effective and sustainable implementation of the UWWTD, countries will need to use cost-effectiveness analysis to prioritize investments for the most impactful projects to fulfil the objectives of the EU Water Framework Directive (WFD) and explore opportunities to increase benefits from UWWTD implementation through the promotion of wastewater reuse and a circular economy approach.

111. Policy recommendations to improve WSS utilities efficiency and performance include:

• Increase the overall financing framework to increase the available funding going to the sector using a combination of tariffs, taxes and transfers, as meeting the region’s demand for WSS services will require significant investments that the public sector or consumers alone cannot afford at this moment. Countries can do this by reviewing tariff methodologies and overall levels vs affordability thresholds and leveraging available grant funding and tax allocations under a strategic sector financial planning approach and development of financing strategies/policies. Total water and wastewater investments in the region in 2017 covered less than 50 percent of needs estimated by the region’s governments to achieve EU or national targets. Tariffs represent on average 58% in the funding of overall sector expenditures, and EU funds (grants) continue to largely fill the funding gap (28%), especially for investments linked to urban wastewater treatment directive implementation.
• Improve the efficiency of service providers through adoption of incentive mechanisms and a longer-term approach that can consolidate emerging positive trends and establish a virtuous improvement cycle, promoting operational improvements which will also lead to improvement in direct cost recovery (via tariffs) and overall improvement in the financial situation and creditworthiness of WSS utilities. This would enable the best performing creditworthy service providers to access commercial and blended finance to continue to improve quality and expand the coverage of services (with support from guarantee schemes where needed). In around two-thirds of the countries, WSS operating costs are covered by revenues from tariffs (whereas three years ago, only half of the countries were covering operating costs), however most utilities have still a long way to become commercially viable. To improve and maintain service quality in the long run, utilities should be able to recover their regular operating and maintenance costs, as well as those necessary for asset management (which will increase further as new infrastructure is put in place - particularly wastewater), to ensure the operational sustainability of newly built infrastructure.
• Focus on building favorable institutional frameworks and enabling environments for improved operational and financial performance of service providers, targeting public resources where they can be most impactful (subsidy mechanisms reach the poor, performance-based financing to service providers to incentivize efficiency and good performance, financing of infrastructure renewal and capex with strong externalities from public budgets, etc.).

112. The report has also highlighted cross-cutting areas of work and opportunities for addressing the above challenges, where several recommendations for countries can be drawn:

• Coordination between the central and local levels of government and further clarification and strengthening of their different roles and those of other water and wastewater sector authorities will be key in a context where most local governments (directly responsible for the services in most countries) have weakened technical and financial capacities.
• Countries in the region should keep developing smart WSS sector policies to create a resilient water supply, drive more effective wastewater management and more responsive utilities, and harness the power of new technologies and innovative schemes to attract financing and expertise from the public and private sectors. Tools available to the countries include planning instruments, strategic financial planning tools, establishment of regulatory agencies or specialized agencies and tariff regulation, platforms for systematic reporting of service provider performance indicator data, benchmarking tools, technical assistance, capacity-building programs35, skills certification programs (some of these are often led at the country level by national WSS utility associations or national local government associations). The digitalization of the water industry also opens doors to a wide array of opportunities for WSS utilities to capture the benefits of digital technologies to improve operations36. Customer and citizen engagement is also an area that can be greatly improved thanks to new digital tools, which can radically change how the water utility communicates to its consumers. Policies could promote increased citizen engagement in the sector, which can go a long way to instill greater sector transparency and accountability and promote a culture of valuing water in society.
• Countries should also invest in the people who will shape and form the future of the sector, and not only in infrastructure. The drive for performance and continuous improvement will require a capable and motivated workforce in the sector at all levels. Policy setting will take committed leaders to embrace their roles and be willing to try new approaches. Managers and CEOs looking for utility turnaround will require vision and skills, as well as a disposition to innovate and adapt. The water sector is undergoing rapid technological advancements and there are great efficiencies to be gained. But these must be paired with the training and development of utility staff. At the same time, improvements of basic technical skills (in NRW reduction, energy efficiency, asset management, wastewater treatment plants operation, water safety planning, preventive maintenance and many others) are required in many countries both at management and operational levels. A diverse, gender and age balanced workforce and adequate recruitment and retention practices will be a foundation for more inclusive, dynamic and talent-oriented modern utilities with motivated and engaged teams of people. Focusing on serving the region’s people’s needs, while building on people’s talent and values will be at the core of transformation to “sustainable water and sanitation services” for many countries in the Danube region.
• Finally, countries and people in the region have a unique opportunity to build on and foster wide-ranging partnerships for sector development. Countries should make full use of the opportunity represented by EU accession in terms of providing an overarching legislative framework and standards, as well as significant funding. They can do so by using these tools to address sector issues comprehensively, moving from a comparatively smaller focus on EU compliance to a one of universal safe services for all. The EU negotiation process and infringement procedures have helped foster a much more vigorous debate on policy decisions, and the general level of awareness in the region on policies and trends and sector situation has improved. Awareness on policy options and good practices is also increasing given thriving knowledge-sharing practices in the region, promoted under different initiatives and platforms, including the Danube Water Program (DWP), Danube Learning Partnership (D-LeaP) and the Regional Capacity Development Network (RCDN), the ICPDR, ISRBC and many others (Global Water Partnership, International Water Association [IWA], the European Water Platform, WssTP, EurEau, Aqua Publica Europea, European network of water regulators [WAREG], IAWD, German Water Partnership, Aquasan, regional conferences, national conferences by national WSS associations, private sector fairs, etc.), as well as universities, academia, think-tanks and scientific community generally from both public and private sector. Very much in the spirit of goals on increased international coordination under SDG on water, countries could also use these partnership opportunities to further prepare their strategies, institutions and utilities for the world of tomorrow.