97255 DANUBE WATER PROGRAM Water and Wastewater Services in the Danube Region Croatia Country Note A State of the Sector | May 2015 danube-water-program.org | danubis.org CZECH REPUBLIC UKRAINE DANUBE SLOVAKIA DANUBE AUSTRIA MOLDOVA DANUBE HUNGARY SLOVENIA CROATIA ROMANIA DANUBE DANUBE BOSNIA AND HERZEGOVINA SERBIA KOSOVO BULGARIA MONTENEGRO FYR ALBANIA MACEDONIA Key Water and Sanitation Sector Challenges XXFinancing compliance with European Environmental Acquis. Croatia committed to comply with the European water-related directives by 2023. Total investment needed is estimated at close to € 3.75 billion. XXEnsuring the affordability of future tariffs. Construction and operation of the new infrastructure to comply with Environmental Acquis will require substantial tariff increases, which might become unaffordable for lower-income part of population. XXImplementing successfully the Aggregation Reform. The Government has decided to merge the municipal utility companies into 20 regional utilities (Uredba o granicama uslužnh područja NN67/14). Focus on actual efficiency gains and better services will be crucial for success. XXStrengthening the regulation in the water sector. The Water Services Council is the economic regulator exclusively for water and sanitation services. Despite the well-developed legal and regulatory framework, the Council is still in the process of fully deploying its regulatory reach. Further resources On water services in the Danube Region XXA regional report analyzing the State of Sector in the region, as well as detailed country notes for 15 additional countries, are available at SoS.danubis.org XX Detailed utility performance data are accessible, if available, at www.danubis.org/eng/utility-database On water services in Croatia The following documents are recommended for further reading; the documents, and more, are available at www.danubis.org/eng/country-resources/croatia XXBelgium. 2012. Waste and Water Management in Croatia. Zagreb: Embassy of Belgium in Croatia, Commercial Section. XXUNECE. 2014. Environmental Performance Reviews, Croatia, Second Review. Geneva: United Nations Economic Commission for Europe. XXVoda. 2010. Implementation Plan for Water Utility Directives. Zagreb: Croatian Waters. XXWB&DE. 2012. Study on Institutional Options in the Water Supply and Waste Water Sector. Zagreb: Witteveen+Bos and Dvokut ECRO. Acknowledgments. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on part of The World Bank concerning legal status of any territory or the endorsement or acceptance of such boundaries. This note has been prepared by David Michaud, World Bank, with the support of Maria Salvetti, consultant, based on the data collection by Miroslav Steinbauer, local consultant. It is part of a regional State of the Sector review led by David Michaud, World Bank, under the Danube Water Program financed by the Austrian Ministry of Finance, whose support is gratefully acknowledged. The authors welcome comments and can be contacted through David Michaud (dmichaud@worldbank.org). Rights and Permissions. The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. DANUBE WATER PROGRAM WATER SNAPSHOT Sources for all numbers in the snapshot are provided in full in the body of this country page; a complete description of the methodology is provided in the State of the Sector Regional Report, at SoS.danubis.org. Danube Danube Access to services: Value Year best average practice average, bottom 40% and poor 100% Context for Services 80% GDP per capita, PPP [current 20,904 2013 16,902 n.a. international $] 60% Population [M. inh] 4.253 2013 8.451 n.a. 40% Poverty headcount ratio [$2.50 0.11 2011 1.65 n.a. 20% a day [PPP] [% of pop]] Local government units 556 2011 1,987 n.a. Piped supply Flush toilet [municipalities] Croatia Danube average Danube best For which, average size [inh] 7,650 2013 4,253 n.a. Total renewable water 2008- 24,495 7,070 n.a. availability [m3/cap/year] 2012 Sector Structure Organization of Services Self provision Zagreb Number of formal water Water-works 140 2012 661 n.a. 19% service providers 17% 55 Municipal Average population served 24,962 2013 9,496 n.a. companies Water services law? Yes 5% Single line ministry? Yes [Ministry of Agriculture] Regulatory agency? Yes [Council for water services] 84 Multi-city Utility performance indicators companies No publicly available? 59% Aggregation of utilities into regional companies, Major ongoing reforms? setup of regulatory framework Access to Services Sustainability Assessment Access to piped water (%) 99 2012 83 100 Financing Piped water Access Investment Flush toilet Access to flush toilet (%) 95 2012 79 99 Wastewater treatment Performance of Services Affordability coverage Service continuity [hours/day] 24 2014 20 24 Operating Customer Nonrevenue water [m3/km/d] 14 2011 35 5 cost ratio satisfaction Water utility performance index 73 n.a. 69 94 [WUPI] Non revenue Continuity water of service Financing of Services Staffing level Wastewater Operating cost coverage 0.97 2009 0.96 1.49 compliance Collection ratio Efficiency Quality Average residential tariff [€/m3] 1.80 2012 1.32 n.a. Croatia Danube average Danube best practice Share of potential WSS expen- Based on normalized indicators, closer to the border is better 2.3 2012 2.6 n.a. ditures over average income [%] Sector Danube Danube best Value Average annual investment Sustainability Average practice 33 n.a. 23 n.a. [€/cap/year] Assessment 72 64 96 State of Sector | Croatia Country Note | 1 DANUBE WATER PROGRAM Context for Services EU MS Danube Danube Indicator Year Source Value average average best Socioeconomic Situation Population [M. inhabitants] 2013 World Bank 2015 4.253 8.481 8.451 n.a. Population growth 1990- World Bank 2015 -0.51 -0.26 -0.37 n.a. [compound growth rate 1990 – 2013] [%] 2013 Share of urban population [%] 2013 World Bank 2015 58 63 63 n.a. GDP per capita, PPP [current international $] 2013 World Bank 2015 20,904 24,535 16,902 n.a. Poverty headcount ratio 2011 World Bank 2015 0.11 1.86 1.65 n.a. [$2.50 a day [PPP] [% of pop]] Administrative Organization No. of local government units [municipalities] 2011 DZS 2012 556 2,335 1,987 n.a. Av. size of local government units [inhabitants] 2013 Authors’ elab. 7,650 3,632 4,253 n.a. Water Resources 2008- FAO Aquastat Total renewable water availability [m3/cap/year] 24,495 10,142 7,070 n.a. 2012 2015 Annual freshwater withdrawals, domestic 2013 World Bank 2015 85 38 26 n.a. [% of total withdrawal] Share of surface water as drinking water source 2014 ICPDR 2015 4 16 31 n.a. Economy. Croatia, which joined the EU on July 1, 2013, is a middle-income country with limited inequalities and poverty issues. Croatia has 4.25 million inhabitants, according to World Bank Development Indicators 2015. Fifty-eight percent of the population lives in urban settings, and the country is relatively densely populated at 75.6 inhabitants/km2. At US$20,904 GDP per capita, Croatia is considered a high-income country; the overall economic situation is, however, challenging, with unemployment around 18% and GDP declining over the last 5 years (World Bank 2015). With a Gini coefficient around 34, and an insignificant proportion of population living in extreme poverty, Croatia’s socioeconomic inequalities are fewer than many countries in the region. The percentage of vulnerable minorities (largely Roma) is low, at 0.4% (DZS 2011). Governance. Croatia, a parliamentary republic with strong local governments, has 21 counties, including the City of Zagreb, and 556 towns and municipalities (DZS 2012). Counties perform activities of regional significance not assigned to bodies of state administration by the constitution and legislation. Towns and municipalities in Croatia represent the lowest level of self-government and perform activities of local significance, including the provision of public services such as water and sanitation (DZS 2012). Water resources. Croatia is a water-rich country split between two river basin districts, the Danube basin and the Adriatic basin. With around 24,495 m3 of renewable water per capita per year, Croatia is a water-rich country (FAO Aquastat 2015); surface water quality is, however, a concern, particularly with respect to nutrient pollution in the Danube basin. The entire Danube basin, and limited parts of the Adriatic basin, are classified as “sensitive areas” in the context of the EU Water Framework Directive (EC 2000). In addition, rainfall is highly seasonal, and in the summer some watercourses, especially on the Adriatic side, have significantly decreased runoffs. Heavy seasonal rainfalls can also produce severe flooding, mainly in the southern part of Slavonia. They cause power outages, landslides, and damage to the infrastructure, affecting water and wastewater services and resulting in possible drinking water shortages. Only a small portion of all available resources is actually used, and although climate change is expected to have a negative effect on both water availability and water demand, no specific strategies have been implemented (MZOIP 2003, 2013). Water supply sources. Water supply comes mainly from groundwater (96%). Surface water provides 4% of overall drinking water supply. Most rivers flow into the Danube or one of its tributaries. The Danube River (coming from 2 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Hungary) and the Drava and the Sava Rivers (coming from Slovenia), which are the major tributaries to the Danube, flow through Croatia. The reduction of industrial activity and the decline in the use of fertilizers and pesticides in agriculture have considerably eased the pollution in surface water sources. However, the quality of rivers in the Pannonian watershed is normally lower than desired due to bacterial pollution, with the worst situation encountered in the Sava River. Groundwater resources are abundant and represent about 96% of total drinking water supply (ICPDR 2015). Despite water abundance, there are quantity problems at key localities such as the Adriatic islands, which have poor water resources. The quality of groundwater is generally considered good throughout the country. The reports on the state of the sea and its water quality indicate that a considerable part of the Croatian portion of the Adriatic Sea is oligotrophic and clean, but the ports of big cities and the industrial zones along the coast are at some locations polluted by organic and inorganic substances. Organization of Services EU MS Danube Danube Indicator Year Source Value average average best Number of formal water service providers 2012 WB&DE 2012 140 1,060 661 n.a. Average population served [inhabitants] 2013 Authors’ elab. 24,605 6,643 9,496 n.a. Dominant service provider type Local / municipal utility companies Service scope Water and/or sanitation Ownership Local governments Geographic scope One to a few cities Water services law? Yes Single line ministry? Yes [Ministry of Agriculture] Regulatory agency? Yes [Council for water services] Utility performance indicators publicly available? No National utility association? Yes [GVIK for water and wastewater with limited role] Private sector participation Limited to wastewater treatment plant construction and operation in Zagreb Service provision. Local governments are responsible for Figure 1: Water services provider water and sanitation services and provide them through types and market shares 156 public utility companies (140 for water and sanitation Self provision Zagreb Water-works service and only 16 for sanitation service). With an average 19% population served of 24,962, the market is dominated by 17% 55 Municipal Zagreb Waterworks, servicing about 17% of the population, companies with a further 84 larger multicity companies servicing 59% of 5% the population. The remaining 24% of the population is either served by 55 small municipal providers (5%) or uses self- provision (19%) or individual water resources (Figure 1). Most utility companies provide both water and sewerage services, 84 Multi-city companies although in larger cities, separate utility companies exist Source: GDWSS 2013. 59% (WB&DE 2012). Policy-making and sector institutions. The sector is controlled at the national level. As shown in Figure 2, local service providers are regulated and controlled by a constellation of national-level actors, the most important of which are: XXThe National Water Council, which is a group of 10 members representing sector professionals and policy makers and tasked with proposing water policies. National Water Council members are appointed by the Croatian Parliament for four years (WB&DE 2012). XX The Ministry of Agriculture, which is responsible for water policies including those related to water services (WB&DE 2012). State of Sector | Croatia Country Note | 3 DANUBE WATER PROGRAM XXCroatian Waters, the national water management agency, which grants and controls water extraction and discharge rights, collects corresponding fees, and reinvests the proceeds into sector investments. It is also in charge of flood protection policy. The board running this national agency is appointed by the Government of the Republic of Croatia (WB&DE 2012). XXThe Water Services Council, which was established by the 2010 Water Act and which is responsible for economic and service quality regulation. Members of the council are nominated by the government and appointed by the Parliament to a five-year term. The 9 members of the council are experts on water supply and wastewater sewerage, water management, the economy, public finance, or other fields (WB&DE 2012). XXThe National Institute of Public Health, which monitors the quality of drinking water (WB&DE 2012).   Figure 2: Water services sector organization National Water National Ministry National level R Regulatory Council P Water Council P of Agriculture I Croatian Waters R Public Institute of Health Regulates tariffs, Discusses policies Implement policies Controls extractions and Controls�drinking service quality discharges, finances water�quality investments Regional level R - regulation Local I Local Owns, governs Water/sewer P - policies level Government S company R Consents to tariffs I - investments S - service provision Source: Authors’ elaboration. Capacity and training. Large utilities are key players in staff capacity building. They tend to attract qualified and competent employees with high levels of education. They play a key role in developing staff training and can be considered a driving force for staff capacity enhancement. However, since the water services management staff is appointed by municipal representatives, it is often replaced according to political cycles. Hence, management staff turnover is high, whereas technical staff turnover remains low. To a lesser extent, the national Croatian Water & Wastewater Association, created in 1972, provides training, technical assistance, and knowledge exchange activities (workshops, conferences, journal) to water sector stakeholders. Economic regulation. Economic regulation is mandated by law, but is still incipient. The 2010 Water Act mandated creation of the Water Services Council, an agency that also serves as the economic regulator exclusively for water and sanitation services (Croatian Parliament 2009; 2011; 2013). The council does not formally license operators, but it reviews and approves any tariff revision before it can be consented to by local governments. Economic regulation is based on the cost recovery principle and a price-cap approach, with a requirement that tariff structures consider subsidy schemes in case an expected water bill is over 2.5% of average household income. The council also monitors service quality and performance through the collection of a series of performance indicators. Despite the well- developed legal and regulatory framework, the council is still in the process of fully deploying its regulatory reach; it has developed instruments for that purpose, including specific by-laws on performance standards, but those have not yet been widely applied. As a result, regulation still needs to be strengthened in terms of human and financial resources, and also by the introduction of a benchmarking platform, currently under development with the assistance of the World Bank. Ongoing or planned reforms. The 2010 Water Act has initiated a significant sector consolidation and modernization process, which is ongoing. In Croatia, service provision was traditionally a local issue, and the sector was largely atomized. The 2010 Water Act (and a separate Water Financing Act) was passed as part of the country’s harmonization with the European Water Framework Directive and daughter directives, but it also created a legal basis for a significant aggregation process, which should culminate in the more than 150 local utility companies being aggregated into around 20 regional providers, generally along county borders. Water 4 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM services areas have been established within which the government will recognize only one service provider (Croatian Parliament 2009; 2013). The change is expected to allow more effective European Funds absorption, create cross-subsidies between smaller and larger cities, and further professionalize service providers. The process of merging and aggregating existing providers requires local government consent though, and implementation should start in 2015, with completion by 2016, according to the Government of Croatia. But with the national elections and change of government by the end of 2015, the timeline of implementation sector reform is becoming increasingly uncertain. Access to Services EU MS Danube Danube Indicator Year Source Value average average best Water Supply Piped supply – average [%] 2012 Authors’ elab. 99 91 83 100 Piped supply – bottom 40% [%] 2012 Authors’ elab. 98 85 76 100 Piped supply – below $2.50/day [PPP] [%] 2012 Authors’ elab. 95 77 61 100 Including from public supply – average [%] 2010 Voda 2010 81 83 74 99 Sanitation and Sewerage Flush toilet – average [%] 2012 Authors’ elab. 95 83 79 99 Flush toilet – bottom 40% [%] 2012 Authors’ elab. 93 74 70 98 Flush toilet – below $2.50/day [PPP] [%] 2012 Authors’ elab. 90 63 54 100 Including with sewer – average [%] 2010 Voda 2010 44 67 66 94 Wastewater Treatment Connected to wastewater treatment plant [%] 2007 DZS 2008 28 62 45 95 Service coverage. Croatia has traditionally had a high level of service, Croatian Data Availability with near-total access to piped water (99%) and flush toilets (95%). The Water Services Council, the national Access to publicly provided services is lower, at 81% for public water supply regulator, recently started collecting data, but and 44% for sewerage (Figure 3). Access to wastewater treatment is still has not yet made it publicly available. Several much lower but is expected to increase dramatically in the near future project-level studies exist, however, which based on Croatia’s commitment to implement the EU Urban Wastewater provide a relatively recent, but partial, picture Treatment Directive. of the sector’s situation. Equity of access to services. Access to water and sanitation by the Roma population needs to be improved. The access rate to water and sanitation facilities for the bottom 40% of the population is high, at 98% and 93%, respectively, and 95% of the poorest share of the population (living on less than $2.50 a day) has access to piped water supply and 90% has access to flush toilets (World Bank 2015). However, according to a UNDP 2011 survey, 35% of the Roma population does not have access to an improved source of water, and 45% does not have access to improved sanitation (UNDP Bratislava 2012). Service infrastructure. Croatian wastewater infrastructure needs upgrading. The water network, which is 4 times as long as the wastewater network, is aging—most of it was installed more than 50 years ago—and its performance could be improved, since the leakage rate is as much as 40%. Among the 141 wastewater treatment facilities, 46% are equipped with preliminary and primary treatments, 51% with secondary treatment, and only 3% with tertiary treatment. The expected deadline for full implementation of articles 3 through 7 of the Urban Wastewater Treatment Directive is December 31, 2023. State of Sector | Croatia Country Note | 5 DANUBE WATER PROGRAM 100% Total 99% Figure 3: Access to Bottom 40% Total 95% water and sanitation: 90% 98% Bottom 40% total population, 93% 80% bottom 40% of the population and poor 70% Sources: Authors’ elaboration, Voda 2010 and DZS 2008. 60% 50% Poor Poor 95% 81% 90% 40% 30% 44% 20% 28% 10% 0% Piped water Public supply Flush toilet Sewer Wastewater treatment Value Value Year Source Water Wastewater Number of treatment plants 60 141 2014 Voda 2014 Length of network [km] 44,363 10,539 2013 DZS 2013 Average connections per km of network 28 46 2014 Authors’ elab. Performance of Services Service Quality EU MS Danube Danube Indicator Year Source Value average average best Residential water consumption [liters/capita/day] 2008 WB&DE 2012 113 113 122 n.a. Water supply continuity [hours/day] 2014 Expert estimate 24 24 20 24 Drinking water quality [% of samples in full 2012 HZJZ 2013 85 96 93 99.9 compliance] Wastewater treatment quality [% of samples in full — — — 79 79 100 BOD5 compliance] Sewer blockages [number/km/year] — — — 3.0 5.0 0.2 Customer satisfaction [% of population satisfied 2013 Gallup 2013 82 78 63 95 with services] Quality of service. Service quality in Croatia is generally very good by regional standards. Water service is continuous, and drinking water quality is mostly in compliance with national and European standards. Although effluent treatment quality is not yet measured in a consolidated manner, most of the wastewater treatment plants are relatively new and can be expected to operate as designed. Customer satisfaction. The satisfaction of the population with the service provided in their city (per the international Gallup Poll) is correspondingly high, at 82%. This number is significantly higher than in most countries in the region. 6 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Efficiency of Services EU MS Danube Danube Indicator Year Source Value average average best Nonrevenue water [%] 2011 DZS 2012 44 34 35 16 Nonrevenue water [m3/km/day] 2011 DZS 2012 14 14 35 5 Staff productivity [water and wastewater] [number of 2012 WB&DE 2012 3 8.7 9.6 2.0 employees/1,000 connections] Staff productivity [water and wastewater] [number of — — — 1.0 1.7 0.4 employees/1,000 inh. served] World Bank 2013a Billing collection rate [cash income/billed revenue] [%] 2012 & World Bank 90 102 98 116 2013b Metering level [metered connections/connections] [%] 2012 WB&DE 2012 100 96 84 100 Water Utility Performance Index [WUPI] n.a. Authors’ elab. 73 80 69 94 Overall efficiency. The efficiency of public water and sanitation service providers is a remaining issue in Croatia. At 44%, nonrevenue water is much higher than best practices in Western Europe, and driven as much by technical as by apparent losses. Commercial practices are largely sound with universal metering, despite a billing collection ratio of around 90%, on average. With an average of 3 staff per 1,000 connections, the sector is less productive than international best practices of 1 and 2, but more productive than the region overall. Recent trends. No significant progress has been made on the efficiency agenda over the last 10 years. Most of the indicators mentioned above show no significant improvements, except in the field of collection rate, which appears to have steadily increased, as shown on Figure 4, at least for the limited subset of 10 utilities for which year-by-year data are available. Figure 4: Evolution of the billing collection rate in a subset of Croatian utilities 100% 90% Collection ratio (%) 80% 70% 60% 50% 2000 2005 2010 2015 Sources: WORLD BANK 2013A; 2013B. State of Sector | Croatia Country Note | 7 DANUBE WATER PROGRAM Financing of Services Sector Financing EU MS Danube Danube Indicator Year Source Value average average best Sources of Financing Overall sector financing [€/capita/year] Authors’ elab. 81 101 62 n.a. Overall sector financing [share of GDP] [%] Authors’ elab. 0.54 0.55 0.45 n.a. Percentage of service cost financed from tariffs Authors’ elab. 57 65 67 n.a. Percentage of service cost financed from taxes Authors’ elab. 20 10 13 n.a. Percentage of service cost financed from Authors’ elab. 23 25 20 n.a. transfers Service Expenditure Average annual investment [share of overall Authors’ elab. 41 42 38 n.a. sector financing] [%] Average annual investment [€/capita/year] Authors’ elab. 33 42 23 n.a. Estimated investment needed to achieve targets 2014-2023 Voda 2010 93 65 43 n.a. [€/capita/year] Of which, share of wastewater management [%] Authors’ elab. 73 64 61 n.a. Overall sector financing. Tariffs represent the largest Figure 5: Overall utility sector financing, 2012 source of financing for the sector. In 2012, water use 100% and water protection fees represented 18% of the Transfers sector funding. Tariffs collected by utilities accounted 90% 23% for 57% of the total financing coming into the sector 80% but failed to fully cover O&M utility costs (Figure 5). As Taxes (national) Investment a result, funding of investment costs rely on national 70% 2% 41% Tariffs taxes and transfers. External transfers represent (governmment) 23% of overall sector financing, and this proportion is 60% 18% expected to rise significantly as EU Cohesion Funds 50% become available to finance necessary EU alignment investments. For illustrative purposes, the standard 40% Tariffs (utility) financing scheme for EU-financed capital expenditures 30% 57% generally include 70% of EU funds, 10% of Croatian O&M 59% Waters funding, and 10% each from national and local 20% budgets. The current proportion between O&M and 10% investments will move further toward investment for the same reason. The main sources of funding of water and 0% Financing Spending wastewater utilities are described in the Figure 6, using the OECD three Ts methodology (tariffs, transfers, and Source: Authors’ elaboration. taxes). Investment needs. Current investment levels are lower than needed to achieve compliance with the EU acquis; they cover only around one-third of the levels necessary to achieve the country’s commitments in terms of meeting the European environmental acquis. EU Cohesion Funds will partly cover the difference, since they usually fund 70% of EU-financed capital expenditures. But tariffs are expected to continue rising in the future to help cover the difference. An estimated €0.85 billion investments are needed to achieve compliance by 2023 with the Drinking Water Directive and another €2.9 billion investments are needed to comply with the Urban Wastewater Treatment Directive. 8 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Figure 6: Main sources of funding of water & wastewater services Loan repayments (funded by national taxes) EU funds IFI loans State Budget Croatian waters (Hrvatske vode) Subsidies (funded Transfer by national taxes) Fees Subsidies Water and wastewater utilities Subsidies (funded by local taxes) National taxes Tariff Consumers and polluters Local taxes Local govrnment budget Source: Authors’ elaboration. Investments. Investment levels in the sector are high compared to the region. Around €33 per capita are invested every year. Those investments are financed predominantly from national sources, in addition to which tariffs play a significant role. The largest share (70%) of this investment goes toward wastewater management (sewer extension and wastewater treatment plant construction), which is consistent with the country’s ambitious EU harmonization goals. Investment levels and source and use of funds have not varied dramatically in recent years (Figure 7). Figure 7: Evolution of investments levels, sources, and uses 250 Source: Sub-national Source: National Source: International 200 Annual investment (M€) Use: Sanitation Use: Water 150 100 50 0 2008 2009 2010 2011 2012 Source: Voda 2012. State of Sector | Croatia Country Note | 9 DANUBE WATER PROGRAM Cost Recovery and Affordability EU MS Danube Danube Indicator Year Source Value average average best Cost Recovery Average residential tariff 2012 WB&DE 2012 1.80 2.18 1.32 n.a. [incl. water and wastewater] [€/m3] Operation and maintenance unit cost [€/m3] Authors’ elab. 1.43 1.77 1.20 n.a. Operating cost coverage World Bank 2009 0.97 1.10 0.96 1.49 [billed revenue/operating expense] 2013a Affordability Share of potential WSS expenditures over 2012 Authors’ elab. 2.3 3.1 2.6 n.a. average income [%] Share of potential WSS expenditures over 2012 Authors’ elab. 3.6 4.7 3.8 n.a. bottom 40% income [%] Share of households with potential WSS 2012 Authors’ elab. 19.4 24.7 14.1 n.a. expenditures above 5% of average income [%] Cost recovery. Seventy percent of services providers in Croatia recover their operational costs from tariffs, and there is no national operational subsidy scheme in place (except for specific cases, such as small islands without local water supply). As shown on Figure 8, however, significant cross-subsidies between residential and industry tariffs exist, with industrial tariffs up to 50% above residential tariffs. Figure 9: Evolution of average tariff (absolute and share of potential expenditure in income) 3% 5% 2.5% 4% 3.6% Average tariff (€/m3) 2% 3% 1.5% 2.3% 2% 1% Residental 1% 0.5% Industrial 0% 0% 2004 2006 2008 2010 2012 2014 Average Bottom 40% Source: WB&DE 2012. Source: WB&DE 2012. Tariffs. Tariffs have increased and will continue to increase in Croatian Waters the near future. Average residential tariffs are higher than the Croatia has benefited enormously from having regional average. Tariffs increased an average of 7.5% annually a strong water management agency, Croatian between 2005 and 2012, while average annual inflation was 3% Waters. Created in 1995, Croatian Waters is a (Figure 8). Tariffs are expected to continue increasing, given the public institution responsible for managing water significant investments and subsequent operating costs linked resources and water management structures in to Croatia meeting the European environmental acquis. Croatia. It oversees two river basin districts. With a staff of almost 800 professionals and an annual Affordability. Affordability is not a constraint for most budget of more than €300 million, mostly financed people, but might become so for certain segments of the from water extraction and discharge fees, it is the population. In 2012, the potential water bill for an average most important technical and financial resource for family was around 2.3% of household income, and 3.6% for the the water sector, including water utilities, and has bottom 40%, above the designated Croatian affordability level contributed significantly to Croatia’s solid service of 2.5% (Figure 8). quality and overall sector performance. 10 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Water Sector Sustainability and Main Challenges To evaluate and reflect the sustainability of services in the region, an overall sector sustainability assessment was done taking into account four main dimensions: access to services, quality of services, efficiency of services, and financing of services. Each of these dimensions is measured through three simple and objective indicators. For each indicator, best practice values are established by looking at the best performers in the region, and the countries closest to those best performers are deemed to have a more mature sector. A more complete description of the methodology to assess sector sustainability is included in the Annex of the State of the Sector Regional Report from the Danube Water Program. The outcomes of this assessment for the Croatia water sector are displayed in Figure 9, which also shows average and best practices in the Danube region. The Croatian sector sustainability score is 72, which is above the Danube average sustainability of 64. The assessment shows that on average, the country performs well in terms of access to piped water and flush toilets, continuity of service, nonrevenue water and customer satisfaction. The main deficiencies of the Croatia water sector identified through the sector sustainability assessment are the wastewater treatment coverage and the operating cost ratio (Figure 9). Financing Piped water Access Figure 11: Sector Sustainability Assessment, Croatia Investment Flush toilet Source: Authors’ elaboration. Wastewater treatment Affordability coverage Operating Customer cost ratio satisfaction Non revenue Continuity water of service Croatia Staffing level Wastewater Danube average compliance Efficiency Collection ratio Quality Danube best practice XXFinancing compliance with the European Environmental Acquis. As part of its Accession Treaty, Croatia committed to comply with the European water-related directives gradually comply with until 2023. The total cost of this effort is estimated at around € 3.75 billion, requiring almost triple the current levels of investments. In addition to financing challenges (which EU funds might partly alleviate), the implementation capacity of the water utilities, themselves in the midst of an aggregation process, is a limiting factor and it is expected that meeting the commitments of the country will be challenging. XXEnsuring affordability of future tariffs. As shown in this note, the current tariff levels in Croatia are already close to reaching affordability concerns, especially for lower-income households or in more impoverished parts of the country. The construction and operation of the new infrastructure to comply with the environmental acquis, as well as application of cost recovery principle will require substantial tariff increases, which might become unaffordable for the lower-income segment of population. These concerns have been taken into account in the Multi-year Program of Construction of Municipal Water Works (Voda 2014). Appropriate mitigating mechanisms will be needed, in parallel with a renewed effort by the regulator to drive the operators’ performance toward ever more efficient levels. XXImplementing successfully the Aggregation Reform. The government has decided to promote a regionalization process for the current municipal utility companies to aggregate providers into around 20 regional utilities State of Sector | Croatia Country Note | 11 DANUBE WATER PROGRAM (Uredba o granicama uslužnh područja NN67/14). The main drivers of this effort are the need to absorb EU funds more effectively, and to cross-subsidize the operation of water, and particularly wastewater, systems in smaller settlements, which might find compliance with the new EU standards expensive. The process is an important opportunity for the sector to develop modern, efficient service providers, but this will require particular attention from the Water Services Council (through its regulatory reach) and the line institutions promoting the reform. XXStrengthening regulation in the water sector. The Water Services Council is the economic regulator exclusively for water and sanitation services. Despite the well-developed legal and regulatory framework, the Council is still in the process of fully deploying its regulatory reach. It has developed instruments for that purpose, including specific by- laws on performance standards, but those have not yet been widely applied. As a result, regulation still needs to be strengthened in terms of human and financial resources, and also by the introduction of a benchmarking platform, currently under development with the assistance of the World Bank. Sources XXCroatian Parliament. 2009; 2011; 2013. Water Act XXUNDP Bratislava. 2012. UNDP/World Bank/EC Regional (Official Gazette 153/2009, 130/2011, 56/13). Zagreb: Roma Survey 2011. Bratislava: United Nations Croatian Parliament. Development Programme Bratislava Regional Centre. XX—. 2009; 2013. Water Management Financing Act XXVoda. 2010. Implementation Plan for Water Utility (Official Gazette 153/2009, 56/13). Zagreb: Croatian Directives. Zagreb: Croatian Waters. Parliament. XX—. 2012. Annual Plan of Croatian Waters. Zagreb: XXDZS. 2008. Statistical Yearbook 2008 of the Republic of Croatian Waters. Croatia. Zagreb: Croatian Bureau of Statistics. XX—. 2014. Multi-year Program of Construction of XX—. 2011. Census 2011. Zagreb: Croatian Bureau of Municipal Water Works 2014-2023 - Draft. Zagreb: Statistics. Croatian Waters. XX—. 2012. Statistical Yearbook 2012 of the Republic of XXWB&DE. 2012. Study on Institutional Options in Croatia. Zagreb: Croatian Bureau of Statistics. the Water Supply and Waste Water Sector. Zagreb: XX—. 2013. Statistical Yearbook 2013 of the Republic of Witteveen+Bos and Dvokut ECRO. Croatia. Zagreb: Croatian Bureau of Statistics. XXWorld Bank. 2013a. Implementation Completion XXEC.2000. EU Water Framwork Directive (200/60/EC). and Result Report (IBRD-72260 TF-54882), on a Loan Brussel: European Commission. for a Coastal Cities Pollution Control Project. Utility Performance Information, Washington, DC: World XXFAO Aquastat. 2015. Food and Agriculture Organization Bank. of the United Nations - AQUASTAT Database. Accessed XX—. 2013b. Implementation Completion and Result Report 2015. http://www.fao.org/nr/water/aquastat/data/ query/index.html?lang=en. (IBRD-74530), on a Loan for an Inland Waters Project. Utility Performance Information, Washington, DC: XXGallup. 2013. World Poll. Accessed 2015. http://www. World Bank. gallup.com/services/170945/world-poll.aspx. XX—. 2015. World Development Indicators. Accessed XXHZJZ. 2013. Croatian Health Service Yearbook. Zagreb: 2015. http://databank.worldbank.org/data/views/ Croatian National Institute of Public Health. reports/tableview.aspx. XXICPDR. 2015. International Commission for the Protection of the Danube River. Accessed 2015. http:// www.icpdr.org. XXMZOIP. 2003. State of the Environment Report - Republic of Croatia 2003. Zagreb: Ministry of Environmental and Nature Protection of the Republic of Croatia. XX—. 2013. River Basin Management Plan 2013 - 2015. Zagreb: Ministry of Environmental and Nature Protection of the Republic of Croatia. 12 | The Danube Water Program | WB & IAWD Croatia Country Note The World Bank / IAWD Danube Water Program supports smart policies, strong utilities, and sustainable water and wastewater services in the Danube Region by partnering with regional, national, and local stakeholders, promoting an informed policy dialogue around the sector’s challenges and strengthening the technical and managerial capacity of the sector’s utilities and institutions. DANUBE WATER PROGRAM www.danube-water-program.org | www.danubis.org | SoS.danubis.org office@danube-water-program.org