WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— Brasov, Romania Teodor Popa and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study BRASOV WATER COMPANY, ROMANIA Context • Upper-middle-income country • Aggregation covering urban and rural areas • Medium level of WSS performance Purpose Performance, professionalization, environment benefits, economic efficiency, equity Scope WSS functions and services Scale • Administrative boundaries • Localities covered: 15 for water and 12 for wastewater • Population covered: 346,330 inhabitants for water and 302,233 for wastewater • Coverage: 95 percent for water and 83 percent for wastewater • Connections: 35,594 for water and 27,197 for wastewater • Network length: 1,263 km for water and 761 km for wastewater Process Top-down with financial incentives Governance • Delegated (49 years) • Public company • Decision making: Municipalities and county councils hold 42 percent of utility shares each; remaining 16 percent is allocated to six other municipalities relative to the proportion of their inhabitants. • Asset transfer: Assets remain the property of local and county authorities and are being transferred to the operator for the duration of the delegation contract. Royalty fee received by local authorities in return for this transfer. This royalty fee is feeding a special fund to finance investments. • Liability: Liabilities and debts from previous operators were not taken over by the aggregated utility. • Staff transfer: There was no commitment to transfer staff. • No clear entry and exit rules 1 In 2017, after a decade of aggregation, the expansion of the county. The process had two stages. First, it concen- Brasov Water Company (BWC) was completed as all envis- trated the operation of services provided to a group of aged localities were covered with water services. In municipalities at the county level. The second step, implementing the aggregation reform, BWC adopted a which has not been achieved yet, aims to concentrate progressive approach, gradually expanding its operation these county utilities into river basin utilities. in surrounding localities benefiting from the European The overall aggregation reform is based on three key Union (EU) investment program. This cautious strategy, in institutional elements: an Intercommunity Development terms of municipalities covered, services taken over, and Association (IDA), a Regional Operating Company (ROC), staff transfer, finally proved successful. This did not go and a contract of delegation of services. The IDA acts as without saying as the aggregation reform triggered polit- the sole interlocutor of the ROC, representing the com- ical resistance from municipalities, which perceived it as a mon interests of its member municipalities regarding loss of power and control over water utilities. water and wastewater services, especially with regard to general strategy, investments, and tariff policy. The From Fragmentation to Aggregation of ROC is a commercial company, owned by the IDA mem- WSS Utilities in Romania ber municipalities, to which the management of the water and wastewater service is delegated through a The water sector in Romania has followed a contrast- delegation contract. The ROC is thus appointed to man- ing evolution over time, fluctuating between fragmen- age, operate, maintain, upgrade, renew, and expand, tation and aggregation. Before the 1990s, Romanian where appropriate, all public assets designated in the water services were supplied at the county level by contract. It collects the invoices paid by customers, in ­ companies that also provided other public services accordance with the contract provisions. The purpose of such as solid waste collection, heating, and the like. aggregation in Romania, as stated in the official Guide to Water infrastructure investments were entirely subsi- Regionalization, is the “improvement of sector perfor- dized by the central government budget and opera- mance by a better management and professionalism, as tional costs were subsidized by local authorities or well as benefiting from scale economies.” However, in through cross-subsidies, with industries paying a the views of the European Commission and the Romanian higher tariff than institutions and domestic users. government, the  regionalization process was also a Immediately after the fall of the socialist system means to promote integrated water resources manage- (1989), the operating areas of these services started to ment in order to comply with EU directives and create narrow down as each local authority wanted to have its environmental benefits. It was as well a way to set up own public service operators. As a result, hundreds of financial solidarity through cross-subsidies at the WSS utilities were then created. county level, and to offset decreases in water sales. In a reverse movement, a comprehensive water sector Service quality and technical capacity enhancement aggregation reform was designed in 2005–2007 and were also targeted, especially as large investment proj- implemented during the five following years. This ects were planned. regionalization consisted of a top-down mandatory pro- cess incentivized by EU investment grants—Sectoral Operational Program Environmental (SOP E) funds— A Gradual Strategy of Expansion at the which were allocated only to projects led by a regional County Level… operator. From an institutional perspective, the regional- Brasov is one of the most important cities in Romania, ization was generally performed through the reorganiza- with about 300,000 inhabitants. It has a powerful tion of public services operated by the capital city of economy, and it is one of the top tourist destinations, 2 Case Study—Brasov, Romania MAP 1. Municipalities Served by the Brasov Water Company located near the best ski resorts in the country. In 2008, shareholders to prevent any unilateral decisions. as a result of the regionalization reform, the autonomous Moreover, according to Romanian law, strategic decisions administration of BWC, was turned into a commercial must be adopted with two-thirds of the votes, which for company, in order to become the ROC. Subsequently BWC BWC  made consensus between the major shareholders signed a delegation contract with the IDA to supply over compulsory. 250,000 inhabitants in eight municipalities. Seven years later, in 2015, the company was supplying BWC capital is composed of its own infrastructure almost 350,000 inhabitants in 15 cities and towns. During and  equipment. Shares were allocated between two the same period, the number of inhabitants receiving sew- major  shareholders: Brasov Municipality and the Brasov erage services increased from 220,000 to over 300,000. County Council, each receiving 42 percent of the shares. Almost 95 percent of wastewater is being treated with The remaining 16 percent was divided among six other secondary treatment. BWC first chose to take over ser- localities, with respect to the proportion of their inhabi- vices in localities that had functional water supply and/or tants. Allocating equal participation to the Brasov County sewerage systems. Where assets were dysfunctional, the Council and Brasov Municipality was aimed at balancing expansion of service area was delayed until investments powers and reaching consensus between those two could be made to ensure sufficient service quality with Case Study—Brasov, Romania 3 TABLE 1. Evolution of the Number of Municipalities, Number of Connections, and Population Served by the Brasov Water Company Item 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 No. of municipalities 9 9 10 12 13 13 13 14 15 15 No. of connections 17,003 17,025 17,100 22,320 24,120 24,363 29,837 33,007 34,714 35,594 Population served 254,345 254,345 281,173 290,995 316,552 316,552 341,483 344,998 346,330 346,330 regard to the level of tariffs applied. In comparison with adjacent to Brasov which joined the IDA pretty late other major water companies, Brasov ROC adopted a vol- because of political resistance and, therefore, was untary and non-intensive approach toward aggregation, included in the SOP Program for only a small amount increasing its service area by 11 percent of connections per of investment. Nevertheless, the service quality year and 3.6 percent of inhabitants served over a decade. improved as the investments increased five to seven times compared with that of the base year of 2008. Nevertheless, from 2008 to 2015, service coverage in The investments planned from 2017 and for the com- terms of population expanded by 40 percent for water ing five years to be a lot more important. From 2008 to and by 36 percent for wastewater. The number of connec- 2016, the economic efficiency of the Sacele water ser- tions doubled, and the length of the water and sewer vice doubled, taking advantage of economies of scale network increased by 50 percent. resulting from its closeness to Brasov city and bene- The caution characteristic of the BWC expansion process fiting from Brasov’s water supply infrastructure. is also illustrated by the staff transfer arrangement cho- BWC also extended a main water line from Brasov to sen by the utility. Although the model of delegation con- Codlea (a city of 20,000 inhabitants, 20 km away from tract prepared by the Environment Ministry advocated for Brasov) and discarded the former water treatment plant, transferring all staff to the incumbent, BWC managed to which used a polluted water source. By 2016, the entire transfer only a small number of operational staff. Billing, water network had been replaced and extended. The financial, and accounting activities were absorbed into sewer system was rehabilitated, and a main collector the existing organizational chart of the company. This was built, as was a brand-new regional wastewater proved crucial to ensuring good financial results in the treatment plant. following years. … and Resulting in Enhanced Performance … Supported by Large Infrastructure and Increased OPEX Investments and EU Cohesion Funds… Since BWC took over, water supply and sewerage systems BWC choose to aggregate only with localities where have been rehabilitated or replaced. New wastewater investments were to be implemented and where the treatment plants have been built, and the new service has service could be enhanced and tariffs could be been upgraded to European standards. All assets have increased at the same time. For example, Codlea was been inventoried in a database connected to a geographi- taken into operation four years after signing the dele- cal information system. Accounting practices have been gation contract, when the new water line providing improved. A medium- and long-term investment plan has 24/7 high-quality water services was completed. BWC been elaborated. Thus, municipalities where the service took over services in two urban municipalities (Sacele was taken over by BWC have witnessed important and Codlea), where it ensured 24/7 high-quality water improvements in terms of technical capacity, environmen- supply. Sacele is an urban municipality of 30,000 tal benefits, equity, and service quality. 4 Case Study—Brasov, Romania FIGURE 1. Evolution of Brasov Water Company Key Performance Indicators after Aggregation a. Drinking water b. Water 100 3.5 70,000 4.0 Pipe breaks per year per km 3.0 60,000 3.5 Income (Leu thousand) Average tari (leu/m3) 98 50,000 3.0 2.5 2.5 Quality (%) 96 2.0 40,000 2.0 94 1.5 30,000 1.5 1.0 20,000 1.0 92 0.5 10,000 0.5 90 0 0 0 07 08 09 10 11 12 13 14 15 16 07 08 09 10 11 12 13 14 15 16 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Pipe breaks per year per km Average tari (Leu/m3) Quality index (%) Operating income (Leu thousand) c. Sewer d. Wastewater 5 60,000 3.0 Blockages per km per year Income (Leu thousand) Average tari (leu/m3) 4 50,000 2.5 40,000 2.0 3 30,000 1.5 2 20,000 1.0 1 10,000 0.5 0 0 0 10 08 09 12 13 14 10 16 11 08 09 12 13 14 11 07 15 15 16 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Average tari (Leu/m3) Operating income (Leu thousand) FIGURE 2. Evolution of Water and Wastewater OPEX This increase is partly due to a rise in labor costs of 22  percent from 2007 to 2016, despite the fact that 200 BWC did not transfer all staff from previous operators. The OPEX structure also evolved during the period 150 as  energy cost share decreased, making room for staff costs. 100 50 Improved Accountability Mechanisms to Enhance Communication with Customers 0 As a consequence of agreements signed with the 08 09 10 12 13 14 11 15 07 20 20 20 20 20 European Bank for Reconstruction and Development 20 20 20 20 Water OPEX per population served (lei/inhabitant) (EBRD) and the European Commission, a range of mea- Wastewater OPEX per population served (lei/inhabitant) sures to help improve accountability had to be imple- Note: OPEX = operating expenses. mented, such as informing and engaging with the community about investment projects, and launching In terms of economic efficiency, results are likely to be public consultation. nuanced. Although water and wastewater tariff and revenues have increased from 2007 to 2016, overall BWC has not encountered real resistance from citi- OPEX and OPEX per population served have clearly zens but was faced with complaints related to tariffs, increased over the same period for both water and introduction of metering, and discomfort caused by wastewater. works. These complaints were dealt with through Case Study—Brasov, Romania 5 FIGURE 3. Evolution of Brasov Water Company OPEX Structure Before and After Aggregation a. Brasov water company, OPEX structure, 2007 b. Brasov water company, OPEX structure, 2015 7% 11% 44% 48% 45% 45% Personnel Energy Other Note: OPEX = operating expenses. individual responses or through the organization of utility and its revenues. They were also reluctant to trans- meetings at the request of residents. BWC set up an fer assets and feared there would be a significant increase information program on investment projects, which in tariffs. The constant support from the two main share- was carried out in schools in villages concerned about holders of BWC along with the aggregation implementa- the various projects. Reaching out to students and tion and the operators’ determination to proceed with teachers proved a good way to also reach out to the  expansion strategy were decisive in overcoming parents. In order to increase accountability, water ­ obstacles. Further aggregation is not foreseen in the next petitions could be filed in each village. These were coming years, but the process is expected to resume with then transmitted to the company for it to respond to the launch of the new EU investment program. as quickly as possible. In addition to an interactive website, BWC set up a call center that features soft- Aggregation Case Study at a Glance ware access to the company database to quickly Key Lessons Learned from Aggregation Case Study answer customer requests. Having a Large Utility as a Nucleus Can Work, but Aggregation of Similar-Sized Small Utilities Can Also Aggregation: Presently on Hold but May Be Successful Resume with Financial Incentives Being The BWC case study describes an aggregation example Available Again that groups urban and rural settlements. In such a con- Despite a gradual and cautious expansion strategy, a few figuration, the larger urban utilities act as a nucleus local authorities opposed resistance to the aggregation around which less populated, less profitable, and lower-­ process. Following the signature of the delegation con- performing service providers aggregate, with the tract in 2008, one municipality left BWC. Some munici- nucleus helping surrounding services to improve. palities were reluctant to lose their control over the water BWC’s operating area is organized around Brasov and 6 Case Study—Brasov, Romania Rupea, two main cities, which have their own water sys- than one stakeholder. Therefore, aggregation pres- tems supplying surrounding rural settlements. A simi- ents an opportunity to adopt sound corporate lar service quality is provided across the operating area. governance principles on autonomy and account- ability. In  Romania, BWC has been turned into a Strong Citizen Engagement and Clear Accountability commercial public company as a result of the region- Improve Support for Aggregations alization reform. Although there are potential benefits attached to util- ity aggregation, the provision of services to a larger Aggregation Takes Time to Show Results; Gradual customer base increases the distance between the util- Improvement Strategies Are Particularly Successful ity management and the final customer, making the Both the aggregation design and the implementa- utility less demand-responsive and causing account- tion take time; in particular, implementation is a con- ability issues (World Bank 2003). In order to address 1 tinuous process that can stretch over decades. As  a these potential accountability issues, utilities can result, aggregation benefits also take time to material- enhance customer engagement mechanisms through ize. A gradual improvement strategy has proved suc- internalized processes. As a consequence of agree- cessful in many case studies, as it spreads the efforts ments signed with the EBRD and the EU Commission, and changes to be made over time, thus not burden- BWC implemented a range of measures to improve ing utilities with having to do too much too quickly. accountability. An information program on investment BWC adopted a progressive approach toward the projects was carried out in schools. Reaching out to expansion of the service area. The number of water students and teachers proved a good way to also reach connections doubled in 10 years, while the population out to parents. To respond to complaints related to tar- served increased by one-third. The utility chose to iffs, to the introduction of metering, or to discomfort aggregate in nearby localities where investments caused by works, water petitions could be filed in each were to be implemented and where service quality village. These were then transmitted to the company could be improved and tariffs increased at the same and dealt with through individual responses or through time. the organization of meetings at the request of residents. In addition to an interactive website, BWC set up a call Note center that features software access  to the company 1. For the purpose of this particular study, accountability is defined as database to quickly answer customers’ requests. being answerable to other parties for policy decisions, for the use of resources, and for performance. Aggregation Forces More Explicit Decision-Making Processes, Leading to Better Corporate Governance Reference Aggregation involves the creation of a new, separate World Bank. 2003. World Development Report: Making Services for Poor organizational entity that is accountable to more People. Washington, DC: World Bank. Case Study—Brasov, Romania 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. If you have questions, email pubrights@worldbank.org. 8  SKU W17045