Decision-making on the reform of urban water services in Ukraine

1. Decision-making on the reform of urban water services in Ukraine Volodymyr Kuznyetsov USRIEP, Ukraine

2. Decision-making on the reform of urban water services in Ukraine 1. Introduction Large cities and small towns in the CEE and CIS countries are presently undertaking significant, though still not large enough, investments in water and wastewater services. The reason is that the population wishes to have: • Regular, 24 hours a day water supply • Clean, potable water There is also: • Growing awareness on environmental issues • Slow recovering from economic depression • Considerable, by local standards, financial support from IFI In addition, Ukraine is trying to upgrade the water services in order to meet EU standards (in line with EU laws approximation process, officially declared by UA Government).

3. Decision making on the reform of urban water services in Ukraine 2. Current situation In most municipalities in Ukraine, the current water sector service levels are quite low. Many water utilities are not able to provide a 24-hour continuous supply. In some cases, utilities are not even able to supply water every day (though these cases are rare !). The water quality is often not consistently adequate and deteriorates over time (especially in flood seasons). The water and wastewater networks are in a very poor condition as a result of a backlog of investment in maintenance and repair.

4. Decision making on the reform of urban water services in Ukraine 3. Technical conditions • 26 % of water supply and sewerage networks are in an emergency state, • 40 % of pump stations require major repair or replacement. • High number of pipe bursts – 2 per 1 km.

5. Decision making on the reform of urban water services in Ukraine 4. Water consumption From 1995 to 2000 a gradual decrease in water consumption was observed: Average 2-4% annual decrease due to economic stagnation, higher water tariffs, water metering, decrease of water availability and access to it. In the past in Kharkiv 60% of water was consumed by population, 20% by industry. Currently – industry 2%, population – 80%. Industry tries to use its own water supply facilities – due to increase in tariffs for industry and cross-subsidies.

6. Decision making on the reform of urban water services in Ukraine 5. Public-private participation Various forms of public-private partnerships are gaining ground in Ukraine within the water services sector(and other municipal utility services – energy, wastes, transportation). PPP projects are usually initiated when the public water utility in question has to undertake a major investment programme but is short of cash, which is a widespread situation in Ukraine and other CIS countries.

7. Decision making on the reform of urban water services in Ukraine • Such public-private partnerships in Ukraine are usually supported and encouraged by IFI (e.g. EBRD, World Bank) which currently invest in projects in the municipal service sector with the goal of improving efficiency and changing the state's role from an operator to regulator. • IFI prefer to work with those regions/municipalities which able to demonstrate a strong and lasting commitment to administrative and tariff reforms, improved fiscal discipline and transparency, as well as the provision of better services to the local population. In reality to practically comply with such requirements turns out to be not easy.

8. Decision making on the reform of urban water services in Ukraine 6. Current PPP projects and initiatives Among projects and programmes undertaken by IFI (EBRD, World Bank) in recent years, should be mentioned: ZaporizhzhiaWater Utility Development & Investment Programme (Initiated in 1999, total budget is Euro 28,062 millions (EBRD), total project budget: US$ 43,168 (with local and other IFI inputs) The project was undertaken to reduce the level of pollution in the Dnieper river as well as improve the efficiency and quality of water and waste-water services in Zaporizhzhia, Ukraine's sixth-largest city with a population of 900,000. The municipality of Zaporizhzhia and Ukraine guarantee the loan.

9. Decision making on the reform of urban water services in Ukraine Under this project, among other things, a new full cost-recovery-based tariff-setting system is proposed. The project also includes a Corporate Partnership Programme involving western operators to enhance the financial and operational performance of the municipal “Vodokanal Company” (Water Utility). One of the principal objectives of the project is to introduce private sector participation in the municipal water utility of Ukraine.

10. Decision making on the reform of urban water services in Ukraine World Bank project in Lviv The Lviv Vodokanal, the city's water and wastewater utility, serves a population of about 800,000 people. In March 2003 the Parliament of Ukraine ratified a World Bank loan for financing of the renovation of Lviv water and sewage systems. Total budget of the Project is $40m of which: • Local government share is $10m; • Swedish International Development Agency grant - $6m • World Bank is $24m • Loan is given for 20 year period

11. Decision making on the reform of urban water services in Ukraine The loan dates back to June 2001, but the Ukrainian side did not agree to loan terms proposed by the WB, because: Short loan period (only 15 years at that time) • High interest rate (16% ) • Imposition of a condition that about US $9m of the project budget should be allocated to foreign consultants and accompanying work • Obligation that under this loan only foreign equipment should be purchased • As a result of intensive negotiations the loan terms were reconsidered, which made it possible for the loan to be ratified.

12. Decision making on the reform of urban water services in Ukraine The aim of the project is: - rehabilitation of pumping stations, - replacement of around 20km of pipelines, - financing the purchase of repair and construction equipment The project will also support the institutional strengthening of Lviv Vodokanal through: - introduction of a management contract, - adoption of new water tariff structures and cost-saving measures, especially aimed at energy saving

13. Decision making on the reform of urban water services in Ukraine EBRD Municipal Utilities Development Programme -Water (Ukraine) The aim of the Programme to assist Ukraine in rehabilitation of water utilities in 8 middle-sized towns of Ukraine. As a result of pre-assessment of institutional, economic, financial and technical conditions at these eight towns, the towns of Kherson, Mariupol, Sevastopol were pre-selected as most fit to meet requirements of the lender - EBRD Total programme budget was estimated at US$ 90 million US$. In practical implementation of the programme in these towns reliance was made upon use of management contracts.

14. Decision making on the reform of urban water services in Ukraine 7. Management contract – new approach Considered by EBRD under EBRD MUDP-Water-Ukraine were a number of options of water utility loans management for Ukraine under the framework of PPP. Finally, of the various forms of private sector participation in Ukraine, a performance based (incentive) management contract has been established as the most appropriate option to meet the objectives of selected water utilities and EBRD (the lender). Such a contract could be signed between a water utility and an international operating company (the Management Contractor) selected through a process of pre-qualification and competitive bidding. The Management Contract would be such that responsibility for the attainment of specified performance improvements would be passed to the Management Contractor, who would be remunerated by a combination of fixed fee and performance related payments.

15. Decision making on the reform of urban water services in Ukraine The rights of the MC will be such that he has sufficient empowerment to enable him to achieve the performance improvements that are contracted. Overall, the MC would be responsible for managing the operations of a selected water utility, however the process of guiding, instructing and developing the water utility would fall to managers and staff in accordance with plans and policies approved by the Supervisory Board, which includes representatives of the municipality, water utility and EBRD. Services to customers would continue to be provided in the name of the particular water utility, and the responsibility for employment of staff and ownership revenues would also remain with this water utility. The senior management of the water utility would have the right to comment on the plans and policies of the MC that are submitted to the Supervisory Board for approval.

16. Decision making on the reform of urban water services in Ukraine 9. Conclusion: Water services reform needs considerable institutional, changes and financial support in form of loans and credits, provided by various lenders. This imposes the need on water utilities to ensure the required level of revenues to maintain their sustainability and be able to repay loans. But in Ukraine revenue risks in water services are quite high. They include: • Possible reduction by consumers of their demand for water; • Non-payment of water bills; • Interference of government or municipal authorities into the process of tariffs size regulation; • Poor enforcement of payment to the detriment of the water services provider; • Poor willingness and affordability to pay for water services of population at large