Private sector participation in the water and wastewater services industry

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Private sector participation in the water and wastewater services industry

Table of Contents

• 1. Introduction
• 1.1 Research Background
• 1.2 Research Objective and Research Plan
• 1.3 Scientific Novelty and Practical Applicability of the Study
• 1.4 Research Structure
• 2. Literature Review and Theoretical Framework
• 2.1 Definitions and Models of Control in Water Supply and Sanitation Industry
• 2.2 Concession Model of Control in Water Supply and Sanitation Industry in International Practice
• 2.3 Models of Control in Water Supply and Sanitation Industry in Russia
• 3. Research Design and Methodology
• 4. Case Study of Control in Water Supply and Sanitation Industry in Perm Part 1: Condition of Networks and Evolution of Control Model
• 4.1 Condition Characteristic of Water Supply and Sanitation Facilities in Perm
• 4.2 Control Model's Evolution in Perm's Water Supply and Sanitation Industry
• 4.3 Analysis of Lease Contract in Water Supply and Sanitation Industry in Perm
• 4.4 Description of the Concession Contract for Water Supply and Sanitation Industry in Perm
• 5. Case Study of Control Model in Water Supply and Sanitation Industry in Perm Part 2: Comparative Analysis
• 5.1 Comparison of Concession Contacts Conditions
• 5.2 Financial Analysis of LLC Novogor-Prikamye
• 6. Discussion
• 7. Conclusion
• 7.1 Results and Findings
• 7.2 Research Limitations and Future Research Directions
• References
• Appendix 1. Capital investments' estimation in economic activity "water collection, purification and distribution" by regions in 2003-2013
• Appendix 2. Conditions of concession agreements in Perm and other cities
• Appendix 3. Main financial indicators of LLC Novogor-Prikamye's activity
• Appendix 4. Data used for a comparative analysis of financial indicators of LLC Novogor-Prikamye and other companies
• 
• 1. Introduction
• 1.1 Research Background
• Development of any community has to be supported by an effective provision of its vital functions. An essential part of such functions is providing citizens, authorities and business with water supply and sanitation facilities. In many countries, particularly in Russia and other post-soviet nations, the government traditionally controlled the whole sector. However, by the end of XX century, the technical condition of water supply and sanitation networks had become very poor. This fact was principally caused by a constant underinvestment in water and wastewater facilities and low government's motivation for an effective management. As a result, a high wear and tear causes a great number of damages on networks and poor quality of drinking water.
• Modernization of water supply and sanitation facilities requires a great amount of investments, which could not be fully afforded by any local authorities (Orlova, 2010). Therefore, many experts argue that the problem of poor networks' condition should be resolved with private sector involvement (Cowdery, 2000; Gregory, 2010; Baumert and Bloodgood, 2004; Svistunov, 2004; Goriachiy, 2011; Karaoglanov, 2008; Varnavskiy, 2005,2007; Cairo and Frangione, 2006). These claim that long-term agreements, such as lease or concession, could attract private investments into the sector. According to these lease or concession agreements, management of water and wastewater facilities should be transferred to the private company, while control and regulation over the services are partly kept by the authorities. research water supply sanitation
• However, other experts point out that interaction of public and private sectors in this industry is ineffective and transferring water supply and sanitation services to the concession would only add to the problem (Dovlatov and Kanivec, 2014; Saliev, 2010; Frank, 2008; Gomez, 2013). Indeed, by virtue of their specificity, companies providing water and wastewater utilities are local monopolies and their privatization is impossible because of their social and strategic significance.
• Therefore, there is no common view on how and by whom water and wastewater facilities should be managed and controlled.
• In this study we intend to define whether existing model of control in this industry is effective or not on the case of the real region.
• 1.2 Research Objective and Research Plan
• The objective of this research is to define the ways of optimising a control model of water supply and sanitation systems in the municipality of Perm, Russia. A crucial part of the research is dedicated to identifying the problems in model of management and control in water supply and wastewater industry in Perm.
• The city in question has a population of about one million citizens. Its water supply and sanitation facilities were devolved to a private company via lease contract in 2004, and then this contract was transferred to a concession agreement in 2013. Perm was chosen as a case study because of its extremely high level of wear and tear of networks - around 77-100% (Bukina, 2013). Moreover, its model of control in the industry changed from government's management to lease contract and then to concession agreement, so it is useful to analyse different models in one case.
• In order to achieve the objective of this research following steps would be taken:

· To study features of water and wastewater sector and industry's specific characteristics;

· To analyse examples of international practice of concession models in water and sanitation industry;

· To consider models of control in water and wastewater industry in Russia;

· To characterize the condition of water and sanitation facilities in Perm;

· To analyse evolution of model of control over the sector in Perm;

· To discuss advantages and disadvantages of the existing model of control in Perm;

· To suggest possible solutions to the problems based on the research discussion.

• 1.3 Scientific Novelty and Practical Applicability of the Study
• Scientific novelty includes implementation of the international experience in the analysis of effectiveness of control model in water supply and sanitation industry in Perm. The comparison of concession agreements in Perm and some cities in other countries has been provided. The financial characteristic of concessionaire company Limited Liability Company (LLC) "Novogor-Prikamye" (LLC Novogor-Prikamye) is also used to make conclusions about Perm's situation.
• Practical applicability of the study implies the possibility to utilize the revealed common features of the best international practices in defining conditions of the model of control in water and sanitation industry. This information could be used by Perm's authorities when creating such models in other industries, and by other local authorities when choosing the appropriate model of management and control in the sector.
• Along with that, results of the case study could be used by Perm's government in order to improve conditions of the current concession agreement and resolve the problems of high level of wear and tear of networks and underinvestment in the industry.

• 1.4 Research Structure
• Chapter 1 is the introduction of the research. The background is explained, outlining the topics of importance and the research problem. Then the research objective is set and the research plan is described.
• Chapter 2 contains the literature review and theoretical framework. Key definitions are given and models of control in water supply and sanitation industry are discussed. International practices of concession and model implementation are discussed, along with the existing models in Russia.
• Chapter 3 describes the research design and the proposed methodology in this dissertation.
• Chapter 4 focuses on the case study of Perm's model of control in water supply and sanitation industry. The condition of facilities is characterized and the evolution of control models in the sector is described.
• Chapter 5 concentrates on the comparative analysis of concession contracts in Perm and other cities. Apart from this, activity of the concessionaire of Perm's water and wastewater facilities - LLC Novogor-Prikamye - is characterized from the financial point of view.
• Chapter 6 contains a discussion of results and possible ways of solution of revealed problems.
• Chapter 7 concludes this research project, with main results recapitulated along with limitations and future directions.

• 2. Literature Review and Theoretical Framework
• 2.1 Definitions and Models of Control in Water Supply and Sanitation Industry
• "Housing and communal service is an activity based on the interaction between producer and consumer about a maintenance of common property in an apartment house, as well as providing it with hot and cold water, power and gas supply, wastewater and heating facilities" (Kameneva, 2010: 7).
• "Water supply means boiler-water conditioning, transportation and supply of drinking water using centralized or decentralized systems of cold water supply or preparation, transportation and supply of hot water using centralized or decentralized systems of hot water supply" (Federal law "On water supply and sanitation" item 2).
• "Wastewater facilities mean reception, transportation and treatment of wastewater using a centralized system of sewerage" (Federal law "On water supply and sanitation" item 2).
• Utilities could be considered as public goods, because they are "non-excludable and non-rivalrous" (McConnell and Brue, 2006:682). Both housing and communal services also have some specific characteristics, such as inelasticity of demand and strong independence of local conditions. However, it is essential to distinguish housing and communal facilities. Their key features are briefly presented in Table 2.1.


Table 2.1: The peculiarities of housing and communal services Created by the author according to the source:

• Medvedev I. Y. (2008) Experience of PPP projects in utilities market: problems and ways of development. International conference “PPP: new opportunities for infrastructure development in transition economy countries", -M. (Original: Опыт реализации проектов ГЧП в сфере жилищно-коммунального хозяйства: проблемы и пути развития. Международная конференция "ГЧП: новые возможности для развития инфраструктуры в странах с переходной экономикой", -М.)

Criterion	Housing facilities	Communal facilities
Ownership structure	Mainly private	Mainly state (local authorities)
Level of monopolization/centralization	Significantly demonopolized	Locally monopolized
Extent of wear	Inhomogeneous extent of wear. Significant proportion of new assets	Overall high. The average level of wear and tear in Russia - 70%, in many regions - 80-90%
Government's responsibility for the maintenance of assets	One-time, when transferring the facility to the private ownership	Permanent, because of the holding of proprietary

• Apart from this, unlike housing services the modern equipment allows to control the consumption of communal facilities by separate customers. This contributes to the possibility of excluding the individuals who have not pay for the services in time. Therefore, communal facilities have features of private goods: excludability and divisibility (Goriachiy, 2011).
• Nonetheless, these features do not allow to conclude, that the market of utilities is competitive. Introducing competition in this industry is rather difficult. Baumert and Bloodgood (2004: 7) points out three reasons for that. Firstly, "there are clear limits on the location of water collection and treatment facilities". Secondly, these facilities are usually object to national laws regarding water rights. Thirdly, Baumert and Bloodgood claim that it is difficult because of "international considerations in the case of important transboundary lakes and rivers". An important factor is also that customers should have choices in a competitive market. However that is impossible in the water market, as consumers cannot choose the pipes used to provide them with water. Therefore, the structure of this market is natural monopoly.
• Despite the difficulty of implementing competition into this industry, some experts believe it is partly possible. For instance, Klein and Irwin (1996) argue that competitive bidding could cause a market discipline in this sector. Bidding means the competition between firms for the right of management and control over facilities. Usually, the most effective company offers the lowest tariffs and win the bidding. However, "in most cases, the competition ends once the contract begins, and the winner becomes the monopoly service provider" (Baumert and Bloodgood, 2004: 7).
• The next feature of water supply and sanitation industry is its high capital intensity. Developing countries spend around $30 billion annually on investments into the sector, however they need twice that amount to renew facilities and avoid environmental crisis in the future (Winpenny, 2003). Some experts point out even higher figures - around $180 billion annually ( Traditionally, around 70% of these investments were financed by governments (Martin and Sohail, 2005). Nonetheless, public capacity to fulfill the industry's needs is limited due to increasing budget expenditures. Thus, the emergence of alternative investors in the sector is vital (McDavid, 2001). Nonetheless, private investors are not eager to participate in the development of water infrastructure. Even during so-called "privatization boom" in 1990-s water and sanitation projects attracted the lowest levels of private investment at 5.4% compared to 18.3% for transport, 33.3% for energy and 43% for telecommunications" (Martin and Sohail, 2005). This may be due to the return on investments in water sector being typically very low: "a water utility must invest $3.50 for every dollar it expects to earn, as compared to $1.80 for an electric utility" (Haarmeyer, 2011: 43).
• According to several researches, attraction of private investors into the sector would only be possible if they could set the tariffs. However, usually tariffs are set by governments, which contribute to the negative financial results of the companies (Dapolito and Derrington, 2010). On the other hand, such policy may be beneficial as water supply is a universal human need and governments should provide citizens with water facilities. A market-defined price may be rather high and some socio-economic categories with low incomes may not afford to pay the fees.
• Despite common features of water supply and sanitation, each country has particular qualities in these industries due to history and legal frameworks.
• Russian water supply and sanitation is regulated by Federal law from 7 December 2011, entitled №416-FL: "On water supply and wastewater facilities". This law covers aims and principles of government's policy, state and local authorities, tariffs regulation. Another important act is Russian's government decree from 13 May 2013 №406 "On government's regulation of tariffs in water and sanitation industry", the crucial aspect of which is new principle of setting tariffs on the period of more than one year (3-5 years). Chibis (2013) argues that business will have attractive mechanisms of investments return as setting long-term tariffs may favour the involvement of the private sector.
• Analysis of concession agreements is important for this research project, which include understanding the Federal law from 21 July 2005 №115-FL "On concession agreements" and Federal law from 7 May 2013 №103-FL "On alteration in Federal law "On concession agreements" plus certain legislative acts of Russian Federation". These are actual titles of the laws. It is no secret that water supply and wastewater facilities in Russia are experiencing a deep crisis, so the main objective of the aforementioned laws is to attract investments and as a result improve the quality of the services. Experts estimate the level of wear and tear of networks in 78-80% and claim that modernization of the sector will require around RUB 20 trillion until 2020 (Goriachiy, 2011).
• Nonetheless, something has been done for the last 20 years. The main goal of President's decree from 28 April 1997 №425 "On the reform of housing and communal services in Russian Federation" was to move from government's subsidization of the industry to full payments for the services by consumers. In 2005 citizens paid 94% of all fees for the utilities, while in 1993 this proportion was less than 2-3% (Varnavskiy, 2007:29). Today customers pay 100%. This trend has stimulated an involvement of private investors in the sector.
• Companies such as JSC "Russian communal systems", LLC "Rosvodokanal" and "Novogor" have entered the marked since 2007 (Suldina, 2007). Investments have also been made with help from the Russian banks - Sberbank and VTB, giving long-term loans to the firm investors. Other players include the World Bank and the European Bank for Reconstruction and Development (EBRD).
• According to Miroshnik (2005), in 2005 the EBRD gave €500 billion on 13 projects in infrastructure development and took part in different projects having a share of up to 35% of the capital, giving loans up to 15 years.
• Despite these steps, it is too little to renew water and wastewater facilities. The main form of private investments attraction in last years was lease contract. However, some authors argue that this form of business and government interaction in this industry is not very effective (Goriachiy, 2011). The point is that according to Russian legislation, modernization and investment are the owner's responsibility while the lessee is responsible only for management over the facilities. One of the decisions of this problem could be an agreement, which transfers the responsibility for modernization to the company-manager, while the ownership is retained by government. Generally, there are three main models of control in water and sanitation industry, two of which are this type (Medvedev, 2008):

1. English model: full privatization of water and wastewater facilities.

2. German model: facilities are included on the balance of joint stock company as a government's share. Authorities keep controlling stake.

3. French model: facilities are managed by private company on the basis of long-term (30-50 years) concession agreement. The investor's ownership right stops when the contract's term finishes.

The first model has not ever been practiced in Russia. The last two are concession models, which have already started to appear in some Russian cities.

The main idea of concession is transferring the management and control over water and sanitation facilities from government to private company, while authorities retain the ownership right (Karaoglanov, 2008:9). The crucial aspect is that concessionaire becomes responsible for modernization of the sector. Amount of investments are specified in the agreement.

Concession model is one of the forms of public-private partnerships. Due to its advantages, this model is implemented in many countries. Its main benefits are presented in Table 2.2.

Table 2.2: Benefits of concession form of PPP in water supply and sanitation industry Created by the author according to the sources:

Kirsanov S. A. (2012) Concession agreements in modern Russia. Management sciences, Science and Education Journal (Original: Концессионные соглашения в со временной России. Управленческие науки, Научно-образовательный журнал) №1(2), pp. 25-33.

Doroshenko D. (2006) Public-private partnership as a method of stimulating an investment development in Russia. Financial business (Original: Государственно-частное партнерство как способ стимулирования инвестиционного развития в России. Финансовый бизнес). - №1. - pp. 17-21.

Advantages for local authorities	Advantages for private investor
Higher effectiveness of projects (state company does not have motivation to increase effectiveness of its activity: the worse it works the more money it will get from the budget)	Government support in big projects (legal etc.)
Decrease of budget expenditures on the maintenance of facilities	Government co-financing of some projects
Attraction of private investments (via contract)	Long-term contract allowing to pay back
High level of expert examination; use of innovative technologies	One of the most inelastic demands on the services, thus, low risk of non-receipt of payments
Use of expert experience
Lower responsibility for activities
Retaining of ownership

As could be seen from the table, concession agreement has benefits both for government and for business. This allows solving existing problems in water and wastewater industry. However, other experts point out that there also are some risks rising from concession contract (Sohail and Cavill, 2009). For example these are commercial and investment risks for concessionaire, so tariffs are usually defined by government and thus, they do not satisfy investors' desires. This risk could be partly eliminated by setting long-term tariffs, which were already discussed earlier. Apart from this, there are some risks for authorities: for instance, an opportunistic behaviour of concessionaire, low quality of services and inability to reconsider the contract. Moreover, government loses permanent communal payments. Finally, some risks for community appear as well. These are risks to be disconnected from water supply and risk of increased tariffs.

Despite the existing risks of public-private partnerships (PPP) in water supply and sanitation industry, advantages seem to overweigh, because concession provides the faster water supply, availability of alternative finance sources, operational effectiveness and accessibility of high-tech solutions (Gomez, 2013:14).

• 2.2 Concession Model of Control in Water Supply and Sanitation Industry in International Practice
• The implementation of concession agreement may vary in terms of its purpose. Some countries use concessions just for management of facilities, while others' goal is to attract the investments into the sphere. According to Goriachiy (2011), in developed countries, such as France or Spain, its main purpose is management of facilities.
• French experience of concessions started more than one hundred years ago. For instance, in Nice, water and wastewater facilities have been managed by a private company Gйnйrale des Eaux since 1864. The company regularly extends the term of the agreement. In the 1990-s, due to high level of corruption, French authorities decided to change the legislation in this sector. In particular, in 1993 the Sapin Law was passed, according to which only the winner of bidding could prolong the concession term. In 1995 the Barnier Law limited the maximum period of concession by 20 years. It was assumed, that these changes would bring competition to the monopolised water market (Goriachiy, 2011).
• Spain also has a rich experience in using a concession model. In Valencia, the control over water and wastewater facilities was transferred to a company Aguas de Valencia (AVSA) in 1902 for the period of 99 years. The company successfully managed facilities throughout the XX century and only in 1990-s the local authorities begun preparing for a new bidding. AVSA with help of consulting firm PricewaterhouseCoopers (PwC) made a requirement: if it loses the bidding, the authorities have to pay it €54 million for its previous investments. The government accepted this and only one company took place in the bid, prolonging the contract for the next 50 years. (Goriachiy, 2011).
• These examples show imperfections of concession model, which are rooted in the lacking competition in the industry. The current concessionaire has always more competitive advantages on the bidding, including being more informed about facilities and having greater ability to influence local authorities (Lobina and Hall, 2003).
• Despite challenges, the purpose of concession in water sector in developed countries remains management of facilities. The objective of concession in developing countries is not only management, but also modernization of the sector. So, such examples seem more useful for this research project, because Russian water and sanitation facilities require much modernization.
• Other examples will be discussed, including the experiences of developed (Australia, Canada, Argentina) and developing (Cфte d'Ivoire, Guinea) countries. Additionally examples of cities from transition economy countries are also discussed (such as Bulgaria, Romania, Ukraine, Czech Republic, Kazakhstan). These examples seem to be useful because some of them also had a Soviet past and control model in water sector in them was similar to Russian cities'. The economy model in these countries transferred in the same way as Russian did, so the evolution of their water industry is valuable for consideration.
• Example 1. Sydney, Australia.
• The main purpose of concession agreement in Sydney was improvement of drinking water quality (Kirsanov, 2012). In 1992, the bidding for building and further use of four water filtration stations was held. The term of contract was 25 years. The winner was the French company Suez Lyonnaise des Eaux with participation of Australian Lend Lease Corporation. They offered an innovative technology of water treatment. The amount of investments was around 200 million of Australian dollars (Noel and Brzeski, 2005). The results were rather successful. Investments and operational costs are fully covered through tariffs, which depend on the volume of produced water. Moreover, the station has been producing water of a much higher quality than it is required according to the contract. It is important to notice, that generally in Australia, water and wastewater facilities are controlled and managed by local authorities, but operate on the commercial basis (Baumert and Bloodgood, 2004). It means that there are no subsidies in the sector and incomes should exceed costs. This motivates authorities to operate more effectively.
• Example 2. Buenos Aires, Argentina.
• By 1990-s, the level of wear and tear of water and wastewater facilities in the city had achieved 79% while government did not have sufficient resources even for covering the depreciation. Only 65% of population had an access to water supply and less than 80% of bills were paid (Martusevich, 2006). In 1933, the government entered into concession agreement on the period of 30 years. Several international companies took place in the tender. The winner had to offer the lowest price on water. The contract's conditions were worked out with the help of international consulting firms and World Bank. The bidding was rather competitive. Eventually Aguas Argentinas headed by Suez Lyonnaise des Eaux Dumez offered the tariff's decrease by 26.9% and won the tender (Svistunov, 2004). All future terms and amounts of investments were defined in the agreement.
• Martusevich (2006) argues that there was a lot of unknown information during the bidding. In 1997 Aguas Argentinas required the revision of the contract as it had lost $217 million in revenue due to uncontrollable factors. The authorities agreed to reconsider the agreement. By 2000-s, Aguas Argentinas had obtained good results:

· Citizens benefited from lower tariff and higher quality of water;

· Annual investments in the sector were estimated in $1.05 billion;

· The proportion of water treatment rose by 39%;

· Around 1500 kms of water and wastewater pipelines were reconstructed or replaced;

· 3 million of new citizens were connected to the networks.

Therefore, concession model in Buenos Aires contributed to the great improvement in water and sanitation industry.

Example 3. Abidjan, Cфte d'Ivoire.

Before a concession agreement, water and wastewater facilities in the city were managed via a lease contract. However, due to macroeconomic crisis in 1980-s, local budgets decreased dramatically. Thus, the authorities in Abidjan made a decision about concession. According to the new contract, the current lessee SociHete de Distribution d'Eau de Cote d'Ivoire (SODECI) became responsible for investments in the sector, in other words it became a concessionaire on the period of 20 years (Martusevich, 2006). Actually, there were no competitive bidding, but the authorities made a threat of competition and SODECI had to reduce tariffs by 25%. Nonetheless, the company remained profitable and paid taxes from the beginning. It was also agreed, that tariffs could be changed each six months.

Concerning the concessionaire's equity, in the middle of 1990-s, it was $15 million and was divided in the following shares: 47% - French company SAUR, 45% - private investors, 5% - employees, 3% - Abidjan's government. SODECI pays its shareholders dividends and its bonds are traded on Abidjan's finance market (Martusevich, 2006).

In 2000-s, SODECI serviced around 4.5 million people, 98% of whom regularly paid the bills. Quality of the utilities in Abidjan was near the level of developed countries while the tariffs did not exceed prices in neighboring south-african nations. Therefore, Abidjan's experience of implementing concession model was rather successful (Martusevich, 2006).

Example 4. Sofia, Bulgaria The following sources from the list of references were used for studying this and the next examples: Dovlatova and Kanivec, 2014..

Sofia's government entered into concession agreement in 1999, when a company named Sofia's Water won competitive bidding. ERDB gave to this company a loan in €37 million for investment purposes. The term of the concession was 25 years. It is important that the plan of tariff increase was defined in the contract.

Shareholders of Sofia's Water changed three times. Initially, the authorities owned 25% of shares, while other 75% belonged to two private companies. Then the ownership structure changed and eventually 77% of shares were bought by French company Veolia Water, other 23% were kept by the government.

Despite a rich experience of the French company, Sofia's water and sanitation facilities were not improved significantly. In 2012, the loss on the networks was around 55%, and the amount of citizens' complaints on a poor quality water continued to rise.

Example 5. Brno, Czech Republic.

A distinctive feature of this example is that Brno's state company, which managed water and sanitation facilities, was privatized in the beginning of 1990-s, and after its IPO 60% of shares were owned by different investment funds, 40% belonged to the authorities. After that, the joint company BWK was founded, 51% of which were owned by the government, 46% - by Suez, and 3% - by other private investors. BWK begun to control and manage the facilities.

Until 1999, the company had operated via leasing agreement. Then, the sector required a huge modernization while the authorities did not want to increase its budget expenditures. Therefore, the responsibility for investments was transferred to BWK, which entered into concession contract with the government on the period of 25 years.

Investment projects were partly financed by the loan from ERDB in €47.5 million and EU grant in €14.2 million. Before giving the loan, ERDB had lobbied a very beneficial methodology of tariff setting. According to it, the tariffs amount was defined on the period of 5 years, which provided BWK with stable revenues.

Overall, the capital expenditures in water and wastewater industry were rather high - around $9 million. Some experts claim that Brno's experience was successful because the government owned a controlling state in concessionaire's equity.

Example 6. Bucharest, Romania.

At the end of the XX century, water and wastewater facilities in Bucharest were in critical condition. The minimum investments required for modernization were estimated in $1 billion, and local authorities did not have such amount. Thus, the decision of transferring the control over facilities into concession was made. World Bank participated in contract drafting. The winner of an open tender was Veolia Water's subsidiary Apa Nova. Its assets were divided in the following way: 74% - Veolia Water, 16% - local authorities, 10% - employees.

For ten years of operating, the concessionaire achieved considerable results:

· The proportion of providing the population with water supply was 93%;

· The company became one of the most energy-efficient firms in Romania;

· 97% of citizens paid for bills;

· Water consumption reduced by 60%.

Apart from this, tariffs were much less than European average, despite they increased from $0.18 per 1 m³ to $1.08. Figure 2.1 shows the advantage of concession model according to tariff amount.

Figure 2.1: Average payment of one household for water and wastewater services in Romania in romanian leu

Therefore, the concessionaire was very effective company, as it could achieve such low tariffs. One of the interesting indicators showing its management effectiveness was number of employees, which was cut from 75 workers per 1000 consumers to 20 workers per 1000 consumers.

Example 7. Lugansk region, Ukraine.

One of the failed examples of concession model implementation was Lugansk region in the Ukraine. In 2008, the bidding was won by LLC Lugansk Water. The tender was held with a lot of contraventions and was not competitive at all.

From the very beginning, the concessionaire increased tariffs by almost 130%. However, its own commitments Lugansk Water did not carried out. For instance, according to the agreement, the concessionaire had to invest into infrastructure 500 million of Ukraine hryvnias in the first five years, but invested just 100 million. The situation had not changed for several years and eventually in 2013, the contract was cancelled.

Example 8. Almaty, Kazakhstan.

In 1999, local authorities of Almaty entered into agreement with French company Veolia about creating a joint company for control water and wastewater facilities in the city (52% - investor's share, 48% - local authorities). According to the contract, the concessionaire had to invest into modernization of networks around $100 million, and in exchange, it asked to increase tariffs by 67% in the next 10 years. However, the contract was prepared superficially, and its conditions did not satisfy the counteragents. As a result, the agreement was cancelled on the start of the project.

Example 9. Guinea Republic.

In Guinea, 10-years contract was won by a joint company, 51% of which belonged to a French firm, 49% - to local authorities (Brook and Smith, 2001). The concessionaire had a right to set tariffs and collect payments.

Due to effective management and investments made, the company could increase water production by 283%, and proportion of citizens having an access to drinking water rose by 24% from 1989 to 1996. Moreover, the percentage of users having water consumption meters grew from 5% to 98% (Brook, 1999).

However, to cover its costs, the concessionaire gradually increased tariffs from $0.12 per 1 m³ in 1989 to $0.83 in 1997. This contributed to a very high proportion of users who did not pay for the services (around 60%). Thus, the contract was not prolonged, and French company left the Guinea water market in 2001 (Brook, 1999).

Example 10. Hamilton, Canada.

Hamilton case is interesting because its local authorities decided to de-privatize water and sanitation industry after some years of using concession model (Frank and Ohemeng, 2008). The authors of the specified article argue that private sector is more effective than public in only commercial organizations, but it fails when it concerns a public good. They use Hamilton's experience to show that transferring of control over water and wastewater facilities to a private company had not contributed to a lower price for customers or reduced government expenditures. The authors also claim that monopolistic industry could not be more effective in private hands.

To sum up, this part of the research was devoted to discussion of implementation of concession model in international practice. As was revealed, some developed countries have been using this form of PPP for decades, and show good results. The only problem in recent years was absence of competition in water and sanitation sector. Several examples were considered in more details, because their problems in water and wastewater industry were alike Russian's current ones. The analysis has shown that concession model could have both positive and negative results. One of the important conclusions is that successful experiences (Sidney, Buenos-Aires, Abidjan, Brno, Bucharest) had some common features. Firstly, local authorities worked out the agreements with the help of international consulting firms, as well as World Bank and EBRD. Well-written contract is one of the key factors of success in concession model.

Secondly, there was a competitive bidding, which revealed the most effective company. Thirdly, some successful experiences had a long-term policy of tariffs setting, which allowed companies to forecast their activity. Moreover, in some cases concessionaires had a right to set prices on their own.

Finally, companies-concessionaires had very good management. This feature is crucial for success, because key objectives of the concessionaire are right resources allocation and costs optimization.

Unsuccessful cases therefore are characterized by absence of one of these features. For instance, Lugansk did not have competitive bidding, and Almaty had a poor contract.

• 2.3 Models of Control in Water Supply and Sanitation Industry in Russia

Models of Control in Water Supply and Sanitation Industry in Russia

International practice has shown that many cities all over the world use different forms of public-private partnership (PPP) in water supply and sanitation industry. The most important act in water and wastewater industry in 2015 is the "Clear water" project by Ministry of Economic Development of Russian Federation. Its purpose is to provide the population with clear drinking water, create an effective business-environment and make conditions for attracting private investments via a transparent system of government's regulation (Project "Clean Water"…, 2015). According to the act, there would be invested into water and sanitation facilities from RUB 20 to 40 billion from the federal budget until 2017.

Several cities have already started to attract private investments into water and wastewater industry using PPP projects. Actually, around 80% of water and sanitation facilities in Russia are managed by state organizations, another 20% - by private companies (Public-private partnership…, 2010). Among these only seven are concession agreements, starting in 2012 in Voronezh (GC "Rosvodokanal"…, 2012). The period of concession was defined as 30 years, the investor's admission - in RUB 798.5 million. The concessionaire (Rosvodokanal) has to invest into infrastructure no less than RUB 2 billion in the first three years. It is early to make conclusions about results of using a concession model in Russia, as its experience just started, yet lease contracts can still be discussed.

One of the most famous examples is project in Rostov-on-Don (Results of first stage…, 2013). The term of the investment project is 16 years and the payback period is 20 years. According to the contract, there were following investors on the first stage of the project (2004-2012):

· Investment fund of Russian Federation - RUB 6.6 billion;

· Rostov-on-Don region's budget - RUB 4.3 billion;

· Local budget - RUB 1.6 billion;

· Investor - RUB 4.8 billion.

The full cost of the project is RUB 37 billion, and on the next stages only private investor will participate. The lessee is an open joint stock company, 25% of which are owned by local authorities, another 75% belong to OJSC "Eurasian" (Affiliates list…, 2013) The investor's lender is the bank VTB.

87% of planned investments were made on the first stage of the project. The worst result was shown by local authorities. They made only 47% of planned investments. Nonetheless, the general results of the first stage were positive. Around 22 thousand of new users were connected to the networks, so about 98% of the population had an access to the services. The average time of disconnection reduced by 25% and 98% of water samples met the requirements. (Results of first stage…, 2013) The investment project in Rostov-on-Don can, to date, be considered successful with the important feature that tariffs are being controlled by governmental authorities.

Another successful example, the Orenburg's PPP experience, modernised water and sanitation facilities in collaboration with the French company "General' Dez'o". The profit of project implementation was shared as follows: 75% investor, 25% local authorities (Medvedev, 2008). The amount of investments was estimated in RUB 1.6 billion.

Table 2.3: Performance indicators of water facilities management in Orenburg before and after PPP project

	State company, 2003	Rosvodokanal, 2004	Rosvodokanal, 2007
Collection rate	82%	92%	98%
Electricity consumption	100%	89%	83%
Water loss	33%	24%	19%
Cost of services	100%	85%	78%
Annual amount of accidents per 1 km	4,36	4,1	3,2

The table above shows some results of attracting private investor into the sector in Orenburg.

One unsuccessful example is Krasnodar region, where in 2010 the Limited Liability Company LLC Yugvodokanal and the local government entered into a 30-year contract to manage water and sanitation facilities. According to the agreement, the investor had to spend around RUB 7.8 billion on the reconstruction and modernization of the facilities (Goriachiy, 2011). Today, the contract seems to be repealed in the nearest future (discontinued). Some experts argue that the main cause of that is low tariff provision. Tariff (the only source of investments return) has not been increased for three years, while Yugvodokanal does not have a right to postpone the investments (Practice of concession agreements…, 2014).

Indeed, tariff is a key factor to attract private investors to the sector of water supply and sanitation. Currently tariff setting in Russia is based more on social than economic reasons. An investment premium in tariff is low, which makes the scale projects financially unattractive to private investors. Hence it is useful to compare the Russian experience with other countries, particularly in terms of tariffs and levels of water consumption. Relevant data about this is presented in Table 2.4 and Figure 2.2.

Table 2.4: Average tariff for water and wastewater services in different countries in $ per 1 m³ Created by the author according to the source:

Water Tariffs Continue Upward Trend. Global Water Intelligence, September 2010. [Online] Available through: http://www.globalwaterintel.com/archive/12/9/market-profile/global-water-tariffs-continue-upward-trend.html (Accessed 3 May 2014)

Country	Total tariff	Water tariff	Wastewater tariff	Water usage by households (per capita a day)
Denmark	8,83	4,32	4,52	114
Australia	5,78	3,14	2,65	605
Germany	5,36	3,33	2,02	151
France	4,56	3,24	1,31	232
UK	4,27	2,07	2,19	139
Czech Republic	3,63	1,86	1,78	213
Canada	3,14	1,95	1,19	778
Poland	3,12	1,44	1,68	149
USA	2,98	1,29	1,69	616
Japan	2,56	1,48	1,08	373
Portugal	2,27	1,62	0,65	308
Spain	2,13	1,47	0,66	342
Turkey	2,14	1,38	0,76	238
Italy	1,81	0,94	0,87	483
Russia	1,00	0,61	0,39	368
South Korea	0,76	0,56	0,20	552
Mexico	0,69	0,65	0,04	200
China	0,46	0,34	0,12	95
India	0,15	0,14	0,01	139

Figure 2.2: Tariff for water and wastewater services and water usage in different countries

The table and figure show that Russian tariff is much lower than European and North America levels, while water consumption is rather high. My personal conjecture as the main cause of such high usage of water would be the Russian perception of water as a rather cheap resource.

As for tariffs comparison, some people could say that it is incorrectly to consider absolute values of prices, as quality of life is different in all countries, so we have to adjust values to average income etc. Nonetheless, when we speak about economic reasons, then there is a sense to adjust tariffs to costs of companies that manage facilities, but these costs in Russia are hardly less than European ones (so the comparison will probably give the similar results with adjusting).


• 3. Research Design and Methodology
• A case study approach has been chosen to discuss water supply and sanitation industry in Perm, Russia. This city has been chosen due to its water and sanitation facilities having an extremely high level of wear and tear (around 77-100% according to Bukina, 2013), suggesting that improvements are essential, and its control model having changed three times in its lifetime. This took place form state management to lease contract and then to concession agreement.
• Moreover, the author had easy access to the relevant data, which facilitated tackling the following research questions:

1. Which indicators reflect the effectiveness of control model in water supply & sanitation?

2. Which aspects play key role in concession agreement?

3. How can common features of international practices be implemented in this case study?

4. How could concessionaire's financial condition influence water and wastewater market?

Confidential, non-public data about LLC Novogor-Prikamye and open sources (Perm city Administration decree…, 2013; Bukina, 2013) have been used to characterise water and wastewater facilities in Perm. These include accident rates, time of disconnection of citizens from the water supply and other indicators (such as, for example, leaks dynamics and causes of damage), which have been analysed from 2007 to 2012. Data from information-analytical platform First Independent Rating Agency (FIRA-PRO), one of the leaders in data providing industry in Russia, as well as publicly available information have been used for further research. Firstly, investments levels in the sector in Perm and other regions have been analysed. Secondly, financial characteristic of Novogor-Prikamye in comparison with other companies has been provided.

A comparative method has been used to reveal the drawbacks of conditions of the concession agreement in Perm, with regards to international experiences considered in the second chapter. Conditions such as existence of competitive bidding, capacity to influence tariffs, proportion of shares in the concessionaire company, involvement of international companies and contract term have been considered.

Primarily, a desk research has been conducted. Public data has been collected online from official websites of analysed companies and Perm's government, as well as from information-analytical platform FIRA-PRO, whilst confidential data has been collected directly from a LLC Novogor-Prikamye personal contact. The qualitative method of case study has been used, along with quantitative complement that analyse data describing financial characteristics of the concessionaire and accident rates.

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• 4. Case Study of Control in Water Supply and Sanitation Industry in Perm Part 1: Condition of Networks and Evolution of Control Model
• 4.1 Condition Characteristic of Water Supply and Sanitation Facilities in Perm
• Before moving to consideration of the control model in water and sanitation sector in Perm, it is crucial to characterize the condition of networks. For that, one of the most objective indicators of its condition is the accident rate. Therefore, let us briefly analyse the amount of damages on the networks and examine their reasons.
• First, the water supply facilities are considered. The total length of these networks is 1193.29 km. Their most commonly used material is cast iron (around 64%), the second one is steel (34%), and then - others. The total amount of leaks has been calculated from 2007 and is presented on Figure 4.1.
• Figure 4.1: Leaks dynamics on water supply networks in 2007-2012
• As can be seen, the amount of damages tend to decrease, however the last year showed a rise by 14.5%. According to 2012 year's statistics, up to four accidents happen in Perm each day. The damages have a slight seasonality that tends to happen more frequently in some winter months (March, December) because of seasonal soil movements.
• The essential step is to reveal causes of accidents. There are around 15 causes of damage in total and these can be divided into two groups: corrosion and other causes. The corrosion group consists of reasons such as damage, corrosive hole dilapidation etc. The second group contains all other causes, for instance, longitudinal and spiral cracks, depressurization of spigot-and-socket joints, ring fracture, amongst others. The calculation has been made from 2010 to 2012. Only leaks from ground and wells were considered, as they contain around 91% of accidents. The results are presented in Table 4.1.
• Table 4.1: Accidents on water supply networks by causes of damage in 2010-2012

Cause of Damage	2010	2011	2012	Average Proportion
Corrosion	891	853	962	77%
Other	335	238	249	23%
Total	1226	1091	1211	100 %

• The analysis has revealed that more than three quarters of all accidents on water supply networks are caused by wear and tear of facilities. The amount of damages caused by this factor increased significantly in 2012. All other reasons combined cause just over one fifth of all accidents.
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