WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— Aguas Do Ribatejo, Portugal José Henrique Zenha and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study AGUAS DO RIBATEJO, PORTUGAL Context • High-income country • Aggregation covering urban and rural areas • Medium level of WSS performance Purpose Performance, professionalization, environment benefits, equity Scope WSS functions and services Scale • Administrative boundaries • Localities covered: 7 • Population covered: 139,853 inhabitants for water and 96,654 for wastewater • Connections: 74,875 for water and 55,035 for wastewater • Coverage: 96 percent for water and 66 percent for wastewater • Network length: 2,051 km for water and 1,035 km for wastewater Process Voluntary and Incentivized (EU funds) Governance • Delegated (40 years) • Public company • Decision making: During General Assembly of share holders; share allocated according to the value of asset transferred by each municipality • Asset transfer: Asset transferred from municipalities to the aggregated utility through lease agreements without a rent payment but with maintenance obligation. These transferred assets remain the property of municipalities. • Liability: No liability undertaken • Staff transfer: Partial staff transfer from municipal departments to the aggregated utility • No clear entry and exit rules Outcome • Positive, but with OPEX increase Findings • Staff transfer (50%), doubts and tensions overcome after two municipalities withdrew permanent political support after implementation, time used to design institutional arrangement is factor of success, higher tariffs, environmental protection arising from sanitation improvement. Note: OPEX = operating expenses. 1 In 2001, nine municipalities from the Ribatejo region municipalities considered that this model was jeopar- in Portugal decided to aggregate their water supply dizing their municipal attributions regarding WSS. To and sanitation (WSS) services as they felt they needed overcome the resistance of some municipalities, a new to improve their quality and performance, among management model was introduced in 2009, allowing other aspects. However, the design of the aggregation state-municipality partnerships. In 2013, in a context process was to take almost a decade, as the municipal- of harsh economic crisis, a trend toward aggregation of ities could not reach agreement on the aggregation multimunicipal systems emerged to overcome eco- governance model to adopt. Some significant tensions nomic difficulties encountered by systems covering appeared, and some municipalities withdrew from the less-populated regions. However, this move created aggregation process. A few years later, the remaining controversy related to the dilution of each municipali- municipalities finally reached an agreement and con- ty’s power into the aggregated multimunicipal solidated into a single utility. The implementation of entity and to the balance of municipalities’ contribu- the aggregation benefited from strong financial incen- tions to the entity. This trend is currently in reversal. tives from the EU Cohesion Fund, which helped to Consequently, the multimunicipal systems created make it successful with regard to its purposes. between 1995 and 2004 have nowadays a different geo- graphical scope and have undergone some juridical evolution too. The Emergence of a National Legal Framework for Aggregation of WSS A Long and Difficult Design Period during Services in Portugal which Some Municipalities Withdrew Until 1974, Portuguese water and sanitation services from the Aggregation were fragmented, with more than 300 municipal opera- The process leading to the creation of Águas do tors functioning without any economic or administra- Ribatejo lasted almost a decade and happened in two tive autonomy. The urgent need to improve WSS phases: from 2001 to 2007, different aggregation services quality and performance in the context of strin- models were discussed; and from 2007 to 2009, gent EU directives led to the adoption of a new specific agreement on aggregation was reached and imple- law in 1993 enacting a broad-scope reform of the sector. mented on the basis of a direct management solution. It kept the distribution of drinking water and domestic The design of the aggregation took quite some time sewage collection at the municipal level. It maintained for a set of different reasons. With the aggregation, the possibility for direct management and also allowed each municipality was to renounce its own services, public-private partnerships. It created an innovative which implied the end of traditional direct manage- solution to improve WSS “bulk” systems through ment, as well as the loss of control over services and regional entities, called “multimunicipal systems,” of direct availability of revenues. Municipal councils owned by the region’s municipalities and a state-owned were also concerned about the loss of proximity to holding (Águas de Portugal) as a majority shareholder. consumers and any potential related political effects. This solution was a compromise between maintaining Other difficulties stemmed from the fact that, in municipal jurisdiction over WSS and setting up new and most municipalities, the aggregation would imply a broader utilities to allow quicker infrastructure devel- rise in tariffs to reach a harmonized tariff for all opment, better management, and improvements in consumers and to accommodate investment needs technical capacity as well as absorption of EU funds. and adequate operational standards. As a result, The implementation of multimunicipal systems the  agreement on a management model was not was  always surrounded by controversy, as many immediate. 2 Case Study—Aguas Do Ribatejo, Portugal In 2001, there were talks with Águas de Portugal, TABLE 1. Allocation of Aguas do Ribatejo’s Shares the state-owned holding company, to create a multi- Among Municipalities municipal system. However, municipalities decided Municipalities Shares allocation (%) instead to proceed with an integrated solution between Almeirim 15.45 bulk and retail activities. The first economic study sup- Alpiarça 5.40 porting that purpose dates back to July 2003. As a Benavente 16.44 second option, they tried to create a common utility, Chamusca 8.15 keeping 51 percent of shares and allocating the remain- Coruche 15.03 ing 49 percent to a private investor. To do so, they Salvaterra de Magos 14.19 prepared and developed a call for tenders. Torres Novas 25.34 When the aggregation process began, it covered nine The assets transferred, which remain the property of municipalities. After a change of political majority the municipalities, do not entail any rent payment and mayor, Santarém—the capital and most popu- from the utility but do entail an obligation to maintain lated city of the region—decided to withdraw from them. The management agreements of each munici- the process, considering that the municipality would pality, delegating to Águas do Ribatejo their water and be subject to an excessive contribution to the com- wastewater services for 40 years, were signed in the mon investment and operational costs, and that it second half of 2008. But one of the municipalities— was not prepared to indirectly subsidize other Golegã—never effectively delegated its WSS services to municipal systems incorporated into Águas do Águas do Ribatejo. As a result, the utility never pro- Ribatejo. The municipality of Cartaxo also decided to vided services to this municipality, which formally left leave. At the time, this decision was very ­contentious. the company in 2011. The same year, another munici- It strongly changed the premises of the tender and pality, Torres Novas, from a neighboring subregion, determined its annulment, generating the need for a decided to join Águas do Ribatejo, and the utility began new consensus and new economic studies to support its operation in Torres Novas in October 2011. the feasibility of a common utility. The institution The aggregation has followed administrative boundar- of  Águas do Ribatejo, with municipalities as sole ies; however, only the original municipalities are con- shareholders, was then decided on. The municipali- tiguous, as Torres Novas does not belong to the same ties hold to the principle of allocating funds and subregion. The area covered by Águas do Ribatejo investment where most needed, even though it amounts to 3,215 km2, and the population supplied is meant that larger municipalities would be subsidiz- close to 150,000 inhabitants. Some of the pipes and ing smaller ones. They considered the common sewer systems have been physically interconnected. ground for aggregation was to reach a similar qual- The aggregation comprised both bulk and retail ser- ity throughout services, thus promoting a principle vices, covering water production and distribution to of solidarity. consumers and domestic wastewater collection, treat- New cost-benefit studies on the utility’s implementa- ment, and discharge. It covered all operational, admin- tion were prepared, and in 2007, Águas do Ribatejo was istrative, commercial, and finance functions. The ­ unicipalities. established as a public company by six m aggregation implied full administrative and commer- It began operation in May 2009. Its capital consists of cial consolidation, with substitution of the new utility the infrastructure of the utility, and shares are allo- for all previous municipal services. Despite the with- cated to municipalities according to the value of the drawal of municipalities during the design phase of the assets they transferred: aggregation, there are no clear entry and exit rules, Case Study—Aguas Do Ribatejo, Portugal 3 MAP 1. Municipalities Served by Aguas do Ribatejo and the addition of Torres Novas was the result of an availability of EU funds to be allocated preferentially ad hoc negotiation. When Águas do Ribatejo began to regional entities as stipulated by the article 12 of its  operation, about two-thirds of the initial staff the Decree no. 191/2000. Águas do Ribatejo has had (83  employees) was transferred from municipal access to the EU Cohesion Fund which covered 60 departments and 48 employees were recruited to com- percent of its investment projects until 2015. The aim plete the workforce. The transfers were the object of a of these projects was to upgrade infrastructure in negotiation with unions representing municipal order to increase water and wastewater treatment employees. As of writing, the transferred staff repre- quality standards to meet EU requirements. The sent 50 percent of all employees. investment  needed was huge and a real driving force, as €113 million was to be spent on WSS infra- structure. There was also another important driver An Aggregation Process Incentivized for the aggregation: the national rules approved to by EU Funds… shape the allocations of the EU Cohesion Fund spec- The process of aggregation was highly incentivized ified eligibility conditions directed toward regional both by the growing requirements and enforceability or, at least, supramunicipal entities, implying a of EU standards for water quality, wastewater treat- continuing trend toward aggregation. Municipalities ­ ment, and environmental protection, and by the also needed to enhance their technical capacity to 4 Case Study—Aguas Do Ribatejo, Portugal carry out investments and improvement projects. TABLE 2. WSS Tariffs Before Aggregation They considered that it would be easier to improve WSS tariffs for 120 m3 consumption before aggregation technical structure and human resources capacity Almeirim €78.12 within a single consolidated utility rather than Alpiarça €158.88 ­ several local services. Benavente €59.92 Chamusca €24 … Which Successfully Improved Performance and Service Quality, aggregation, drinking-water quality and sanitation as well as Cost Recovery levels improved significantly. From 1993 to 2015, The key indicators for assessing the aggregation the  safe drinking-water indicator improved from outcomes are related to its main purposes, that is, 50 percent to 98.78 percent for the country, on aver- performance and quality enhancement, professional- age, while in Águas do Ribatejo the indicator reached ization and technical capacity improvement, equity, 99.57 percent. The decrease of sewer blockages is also and environmental benefits. As a result of the very impressive, although the data seem unstable TABLE 3. Evolution of Key Performance Indicators Before and After Aggregation Assessment indicators associated After aggregation (average Before aggregation (2009) with targeted purpose value for 2014 and 2015) Service quality Continuity (hours/day) n.a. 23.5 enhancement Non-revenue water (m3/km/day) 10.9 5.8 Water network per municipality (km) 1,769 2,051 Sewerage network (km) 759 1,035 Sewerage blockages (no./km/year) 4.1 0.2 Technical capacity Staff productivity Per water produced (m3/employee) n.a. 75,286 m3/employee Per water connection n.a. 443 connections/employee (connections/employee) Long-term and medium-term No Yes investment plan Assets inventory No Yes Staff training expenditure n.a. 894 training hours (from 2011 to (hours/year) 2013, staff training hours tripled) Private sector participation Yes Yes Environmental benefits Existence of IWRM Yes Yes Drinking-water quality (%) 98.79 99.57 Connection to wastewater treatment 39,781 55,035 plants (no. of connections) Wastewater treatment quality (%) 57 90.50 Equity Different tariff for each Harmonized tariff for all municipality municipalities Note: n.a. = not applicable. Case Study—Aguas Do Ribatejo, Portugal 5 over time. The compliance indicator for wastewater aggregation purpose. In most cases, these subsidies discharge parameters has grown from 57 percent in are used to fund investment programs, thus acting as 2009 to 91.5 percent in 2015. According to informa- the Big Push, which helps WSS services get out of the tion provided by the utility, the contribution of newly low-level equilibrium trap. In Portugal, to be eligible built  wastewater treatment plants, covering about for the EU Cohesion Fund, utilities had to oper- 90  percent of the population served, was key to ate with a regional or at least supramunicipal scope, achieving those results. Non-revenue water was thus implying a trend toward aggregation (Decreto- reduced by 47 percent between 2008 and 2014, while Lei 191/2000, article 12). The utility Águas do Ribatejo percent. the length of the network expanded by 16  ­ received EU funds that covered 60 percent of its The professional organization of services and their investment program for the same period. operational practices have dramatically changed. Regarding technical capacity, the utility has devel- Aggregation Forces More Explicit Decision-Making oped a long-term investment plan and has an asset Processes, Leading to Better Corporate Governance inventory. The staff coordinated the €113  million Aggregation involves the creation of a new, separate investment which helped services taken over by organizational entity that is accountable to more than Aguas do Ribatejo to get out of the low-level equilib- one stakeholder. Therefore, aggregations present breaking the vicious cycle of low rium trap, thus ­ an opportunity to adopt sound corporate governance price–low quality. An identical price per cubic meter principles related to autonomy and accountability. is charged in all  municipalities. As a result, every Águas do Ribatejo, a public limited company created to consumer pays €170.52 for an annual consumption provide bulk and retail water services, was able to of 120 m . 3 increase the water tariff and set up a uniform tariff in the seven municipalities from its service area. This This represents a 7 percent to 8 percent increase com- new tariff represented a 7–8 percent increase in the pared with the price paid in 2008 in the two municipal- two municipalities where tariffs were the highest prior ities where the tariffs were the highest. It represents a to aggregation and a 600 percent tariff increase in the 600 percent increase for the municipality that had the municipality that had the lowest tariffs. This tariff lowest tariffs. But this increase is a positive manage- policy was viewed as a positive management improve- ment improvement, as the price before aggregation ment toward sustainability, as the price before aggre- was heavily subsidized by municipal budgets. Hence, gation was heavily subsidized by municipal budgets water tariffs currently implemented by Águas do and was not cost-reflective. Corporatization also brings Ribatejo are more cost-reflective, making the service managerial independence to utilities that can make more sustainable financially. their own decisions regarding staff recruitment or wage policy, thus lowering or preventing political interference and patronage. When Águas do Ribatejo Aggregation Case Study at a Glance was created, about two-thirds of its initial personnel Key Lessons Learned from Aggregation Case Study were transferred municipal staff. One-third were Financial Support and/or Incentives (a “Big Push”) Are recruited directly by the newly aggregated utility. Important to Help Services Get Out of the Low-Level Equilibrium Trap Defining Principles but Allowing Flexibility in To boost the success of aggregation reforms, exter- Implementation Ensures Local Ownership nal stakeholders can provide financial support National reforms are more likely to be successful to  aggregating utilities to help them achieve the when  they follow the principle of subsidiarity and 6 Case Study—Aguas Do Ribatejo, Portugal allow flexibility for local stakeholders to own the disappear over time, thus potentially jeopardizing the aggregation process and adapt it to their local context. aggregation design and implementation. The  cre- In Portugal, the central government created in 1993 a ation of Águas do Ribatejo took quite some time, as “multimunicipal management” model to improve WSS agreement on a management model was not immedi- “bulk” systems through regional entities, owned by ate. In 2001, there were talks with Águas de Portugal Águas de Portugal, a state-owned holding, as a major- to create a multimunicipal system, but this solution ity shareholder. However, several municipalities was dismissed. A second option consisted in creating resisted the implementation of this model for fear of a common utility and allocating 49 percent of the losing their WSS responsibilities. In 2009, the central shares to a private investor. A call for tender was government introduced a new management model developed. At that time, the scale of the aggregation for bulk and retail services, called a state-municipality reached nine municipalities. But after a change of partnership, to facilitate further the potential for political majority and mayor, Santarém—the capital aggregation in the WSS sector. and most populated city of the region—decided to withdraw from the process, considering that it would When Political Leadership Changes over Time, be subject to an excessive contribution to the common Aggregation Can Be Jeopardized investment and operational costs and that it was not The flip side of having a champion as a success factor prepared to indirectly subsidize other municipal sys- is that relying on the leadership of a single champion tems incorporated in Águas do Ribatejo. The munici- can sometimes be hazardous. Policy makers and pality of Cartaxo also decided to leave. At  the time, aggregation promoters would do well to not design this decision was very contentious and strongly the aggregation around specific people and circum- changed the premises of the aggregation. The tender stances. Due to political cycles, local representa- was annulled, generating the need for a new consen- tives  may not be  reelected. As a result, leadership sus and new economic studies to support the feasibil- stemming from a single local stakeholder may ity of a common utility. Case Study—Aguas Do Ribatejo, Portugal 7 © 2017 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. 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. This work is subject to a CC BY 3.0 IGO license (https://creativecommons.org/licenses​ by/3.0/igo). The World Bank does not necessarily own each component of the content. It is your responsibility to /­ determine whether permission is needed for reuse and to obtain permission from the copyright owner. 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