97229 DANUBE WATER PROGRAM WATeR AnD WASTeWATeR SeRvIceS In The DAnuBe RegIon Hungary Country note A State of the Sector | May 2015 danube-water-program.org | danubis.org UKRAINE DANUBE AUSTRIA Key Water and Sanitation SeCtor CHallengeS XXachieving full cost recovery. Many of hungary’s water utilities have carried out eu and government-sponsored investments in the last few years. As a result of the financing agreement, the depreciation of these investments must be covered by tariffs. But the future maintenance costs of these recent development projects still have to be included in the price of the services. Moreover, since water and sewerage tariffs were frozen in 2012 and were decreased by law in 2013, revenues collected by utilities are decreasing. XXPreventing the degradation of assets in the longterm. While assets of most water utilities have been properly maintaining their assets for the last two decades, few companies have made an effort to create sufficient reserves for their future replacement. As a result, the infrastructure is aging and its average condition is slowly declining. Due to the 2013 tariff cut, utilities have accumulated even lower reserves than before, and maintenance has become problematic for many operators. XXPreparing for the risks caused by climate change. Most water utility managers are aware of the types of risks caused by climate change (such as new patterns of precipitation, stress on sewers, changing patterns of water consumption, and change in water resources used for drinking water), but the everyday challenges of maintaining a high level of operation under worsening financial conditions make it difficult to focus on the long term, and there has been almost no preparation to address the identified risks of climate change. 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 Hungary The following documents are recommended for further reading; the documents, and more, is available at www.danubis.org/eng/country-resources/hungary XXKvvM. 2010. National River Basin Management Plan. Budapest: hungarian Ministry of environment and Water. XXMinRD. 2013. Water Strategy. Budapest: hungarian Ministry of Rural Development. XXTamás, h.M. and P. gábor. 2012. Nem folyik az többé vissza: Az állam szerepének átalakulása a víziközmű-szolgáltatásban. Budapest: hungarian Academy of Sciences. 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 András Kis and gábor ungvári, both of ReKK (www.rekk.eu), with the support of Maria Salvetti, 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. Access to services: Danube Danube average, bottom 40% and poor Value Year best average practice 100% Context for Services 80% gDP per capita, PPP 22,877 2013 16,902 n.a. 60% [current international $] 1990- 40% Population [M. inh] 9.897 8.451 n.a. 2013 20% Poverty headcount ratio 0.35 2011 1.65 n.a. [$2.50 a day [PPP] [% of pop]] Piped supply Flush toilet Local government units 3,152 2014 1,987 n.a. [municipalities] Hungary Danube average Danube best For which, average size [inh] 3,140 2013 4,253 n.a. Total renewable water 2008- Sector Structure 10,425 7,070 n.a. availability [m3/cap/year] 2012 Self provision 2 Private concessions Organization of Services 6% 2.5% number of formal water 41 2014 661 n.a. service providers 5 Large regional Average population served 226,912 2013 9,496 n.a. utilities Water services law? Yes 28% Single line ministry? Yes [Ministry of National Development] 34 Municipal Regulatory agency? Yes [HEA] utilities utility performance indicators 63.5% No publicly available? Major ongoing reforms? Sustainability Assessment Access to Services Financing Piped water Access Access to piped water (%) 97 2012 83 100 Investment Flush toilet Access to flush toilet (%) 93 2012 79 99 Wastewater Affordability treatment coverage Performance of Services Service continuity [hours/day] 24 2013 20 24 Operating Customer cost ratio satisfaction nonrevenue water [m /km/d] 3 6.1 2012 35 5 Water utility performance index Continuity 81 n.a. 69 94 Non revenue [WUPI] water of service Financing of Services Staffing level Wastewater compliance Collection ratio perating cost coverage operating 0.89 2011 0.96 1.49 Efficiency Quality Average residential tariff [€/m3] 2.43 2012 1.32 n.a. Hungary Danube average Danube best practice Based on normalized indicators, closer to the border is better Share of potential WSS expen- 2.9 2012 2.6 n.a. ditures over average income [%] Sector value Danube Danube best Sustainability average practice Average annual investment Assessment 13 n.a. 23 n.a. 74 64 96 [€/cap/year] State of Sector | Hungary 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 9.897 8.481 8.451 n.a. Population growth 1990- World Bank 2015 -0.20 -0.26 -0.37 n.a. [compound growth rate 1990–2013] [%] 2013 Share of urban population [%] 2013 World Bank 2015 70 63 63 n.a. GDP per capita, PPP [current international $] 2013 World Bank 2015 22,877 24,535 16,902 n.a. Poverty headcount ratio 2011 World Bank 2015 0.35 1.86 1.65 n.a. [$2.50 a day [PPP] [% of pop]] Administrative Organization No. of local government units [municipalities] 2014 Gov. HU 2015 3,152 2,335 1,987 n.a. Av. size of local government units [inhabitants] 2013 Authors’ elab. 3,140 3,632 4,253 n.a. Water Resources 2008- FAO Aquastat Total renewable water availability [m3/cap/year] 10,425 10,142 7,070 n.a. 2012 2015 Annual freshwater withdrawals, domestic 2013 World Bank 2015 12 38 26 n.a. [% of total withdrawal] Share of surface water as drinking water source [%] 2014 ICPDR 2015 5 16 31 n.a. Economy. Hungary is an upper-middle-income country with substantial regional differences. GDP per capita is higher in Central Hungary, which includes Budapest, where this indicator is slightly above the EU average. In Western Hungary, the GDP per capita falls between 75% and 100% of the EU average, while for the rest of the country (South, North, and Eastern Hungary), this value is between 50% and 75% of the EU average. Various other indicators (e.g., unemployment levels, investments, access to highways, life expectancy) show a similar disparity. Hungary has been an EU Member State since May 2004 (GVI 2013). Governance. The guiding principle of recent regulatory reforms has been centralization; i.e., increasing the role of the central government and reducing the responsibilities and resources of municipalities. Hungary is a unicameral parliamentary republic and the government directs and oversees the operation of the state administration. Hungary’s public administrative regional units are comprised of the capital city and 19 counties. Budapest is composed of 23 districts. There are 3,152 cities and municipalities in Hungary (Gov. HU 2015). Each county and district in Budapest is self-governed. The government is responsible for most water utility governance, but the municipalities and central government are responsible for water and sanitation service provision. Water resources. Water resources in Hungary show regional and seasonal limitations, which may escalate with climate change. Hungary has sufficient water resources, but there are significant differences in regional distribution. The total renewable freshwater quantity is 10,425 m3/capita/year (FAO Aquastat 2015), and the overall quality is good, but two-thirds of the recent subsurface consumption is supplied from water bodies in weak or uncertain status. In response to climate change, a national climate strategy (NÉS) was adopted in 2008, and in 2013, a separate national water strategy was created that emphasizes the protection of water resources. These documents primarily address the necessary measures needed to cope with the consequences of parallel increases in drought and flood frequency on the economy and the environment. Urban heat waves are a specified vulnerability for Hungary that could have a direct connection to water utilities. Better management of precipitation and the creation of storage facilities to meet nondrinking water needs are envisaged to reduce this vulnerability. Flood protection actions target the reinforcement of dykes and the creation of flood water storage reservoirs to lower peak flood levels. The use of subsurface resources cushions the sector from the most direct effects of climate change. 2 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Water supply sources. Bank-filtered and subsurface resources are the key source of water supply. The direct use of surface water for domestic/public purposes is minor (5%), whereas bank-filtered resources (indirect service provided from surface water) represent 40.5%. The domestic/public consumption of subsurface resources amounts to 54.5% of the overall water resources used (KvVM 2010). The bank-filtered resources are generally of good quality and quantity. however, they are dependent on river morphology developments. The use of subsurface water resources is concentrated, and there are local resource constraints with respect to the volume of extraction. Shallow subsurface sources are often polluted, especially from agricultural sources. organization oF ServiCeS EU MS Danube Danube Indicator Year Source Value average average best number of formal water service providers 2014 expert estimate 41 1,060 661 n.a. Average population served [inhabitants] 2013 Authors’ elab. 226,912 6,643 9,496 n.a. Dominant service provider type Municipal utilities Service scope Water and wastewater ownership Municipal (51%), state (23%), mixed involving private operators (20%) geographic scope one to several hundred settlements Water services law? Yes Single line ministry? Yes [Ministry of national Development] Regulatory agency? Yes [heA] utility performance indicators publicly available? no national utility association? [MAvIZ for water and wastewater] Yes [MA Private sector participation Limited and declining due to regulatory restrictions Service provision. Municipalities and the central government FIgURE 1: WATeR SeRvIceS PRovIDeR are responsible for service provision. Depending on the TYPeS AnD MARKeT ShAReS ownership of assets, there is a mixed responsibility for service Self provision 2 Private concessions provision between the central government and municipalities. Before 2012, there were close to 400 water utilities. As a result 6% 2.5% of a water utility sector reform, this number decreased to 41 in 5 Large 2015 (Figure 1). By 2017, the minimum required size to obtain a regional utilities license for operation will be 150,000 population equivalent (p.e.). 28% Almost all municipal utilities serve several towns and villages, some of them covering over 100 settlements. The assets of these companies and of the service provider utility company are owned by the participating municipalities. The five regional utilities are predominantly state owned (only a few percent of shares are owned by municipalities and employees), while the assets used 34 Municipal utilities for service provision are partly state owned and partly municipally owned. each of these companies serves over 100 settlements. 63.5% There are two water and wastewater concessions serving 2.5% of the population, located in Szeged (Szegedi Vízmű) and E: RZS 2012B. E SoURcE: Szolnok (Víz és Csatornaművek Koncessziós ZRt). There is also one wastewater only concession in Budapest (FCSM). State or municipal water utilities serve 91.5% of the inhabitants. The rest of the population relies on self-provision (6%). State of Sector | Hungary Country Note | 3 DANUBE WATER PROGRAM Policy-making and sector institutions. Since 2012, the Hungarian Energy and Public Utility Regulatory Authority (HEA) has been the key institution that regulates and oversees the water sector. The 2011 sector reform in its Act CCIX on Water Utility Supply established a central regulator, replacing a primarily municipally regulated system. There is also a clear line ministry and no overlapping between mandates of the institutions involved in the sector. At the national level, the key stakeholders are (Figure 2): XXThe Hungarian Energy and Public Utility Regulatory Authority (HEA), which is responsible for economic regulation, licensing, and monitoring of the water and sanitation sector. XXThe Ministry of National Development, which is responsible for approving the tariffs proposed by HEA. XXThe General Directorate of Water Management, which is part of the Ministry of the Interior, which is the line ministry for the water sector. Its regional bodies are responsible for management of the state-owned infrastructure against water damage, and for water management. XXThe National Public Health and Medical Officer Service, which is responsible for monitoring drinking-water quality, through its county-level bodies. XXThe National Inspectorate for Environment, Nature and Water, which is part of the Ministry of Agriculture and which is in charge of monitoring effluent discharges and the environmental status of water bodies. It also issues water extraction and wastewater discharge licenses. Figure 2: Water services sector organization National P General R National National level R HEA Directorate R Inspectorate for Public Health I of Water Management Environment Institute Regulates tariffs, service quality, Discusses and Monitors effluent quality Controls drinking operation licensing of water utilities implements policies water quality Regional level R - regulation Local I Local Owns, governs Water/sewer P - policies level Government S company R I - investments S - service provision Source: Authors’ elaboration. Capacity and training. There is no formal training institute for the water utility sector. The water utility association (MAVIZ) organizes occasional training sessions, workshops, and conferences. Staff are usually highly qualified, especially in large water utilities, and staff turnover is generally not a problem. Economic regulation. The central regulator, HEA, is in charge of developing tariff proposals for approval by the Minister of National Development. Based on the tariff-setting regulation (a government decree) currently under development, water utilities will submit detailed information to the water utility regulator, which will make a tariff proposal to the Minister of National Development, which will set the tariff. A new tariff methodology is under development. Two-part tariffs are prescribed by law, and up to 50% of cross-financing between commercial and household customers is allowed. Until the above-mentioned decree is passed, tariffs were frozen at current levels in 2012 and further decreased by law in 2013. They will probably be set according to the new regulation in 2016. 4 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Ongoing or planned reforms. An ongoing water utility Regionalization sector reform, which started in 2011 and is expected Act CCIX on Water Utilities declared that the integration of water to be completed by 2016, seeks to establish a central utilities is a goal of principle, setting a minimum size requirement agency responsible for the economic regulation of the of 150,000 population equivalent (p.e.) to be reached by sector. The former Hungarian Energy Office is enlarged December 31, 2016. To promote the timely execution of mergers, (into a Public Utility Regulator, HEA), and regulatory the regulation also declared a transitional deadline of 100,000 p.e. tasks related to other sectors are included in the by December 31, 2014. Among others, meeting the prescribed regulatory scope of HEA. Water utilities can operate only size is a precondition to obtaining an operating license from HEA. if they have a license issued by HEA, which underscores Given the minimum size requirement, utilities and municipalities the power of the regulator in licensing. The regulation had an incentive to start negotiations in order to complete prescribes a minimum utility size, measured as mergers or establish new operating contracts. As a result, population equivalent being served. The lowest accepted regionalization was a “free will” process among sector players. value of this figure is 150,000 p.e. Water utilities When a small municipal water utility is not able to get an therefore must reach this size by 2016, with some operating license, and the municipality is unable to contract with a intermediate deadlines to show progress. The number larger licensed utility, HEA is entitled to designate an existing large of utilities has already fallen from around 400 to under utility as the “operator of last resort,” which then has to provide 50. Water utilities are obliged to make rolling investment services to the municipality for a temporary period. Today, there plans for a period of 15 years and submit them for are 41 water utilities in Hungary, and this number is expected to approval by the HEA each year. Private participation further decline by the end of 2016. The five state-owned regional is seriously restricted for both investments by private utilities had a major role in integrating the smallest service partners and outsourcing. providers, fulfilling their informally acquired mission. Access to Services EU MS Danube Danube Indicator Year Source Value average average best Water Supply Piped supply – average [%] 2012 Authors’ elab. 97 91 83 100 Piped supply – bottom 40% [%] 2012 Authors’ elab. 94 85 76 100 Piped supply – below $2.50/day [PPP] [%] 2012 Authors’ elab. 98 77 61 100 Including from public supply – average [%] 2012 KSH 2014 94 83 74 99 Sanitation and Sewerage Flush toilet – average [%] 2012 Authors’ elab. 93 83 79 99 Flush toilet – bottom 40% 2012 Authors’ elab. 87 74 70 98 Flush toilet – below $2.50/day [PPP] [%] 2012 Authors’ elab. 98 63 54 100 Including with sewer – average [%] 2012 KSH 2015 74 67 66 94 Wastewater Treatment Connected to wastewater treatment plant [%] 2012 KSH 2015 72 62 45 95 Service coverage. Hungarian utilities provide almost full access to drinking water services, and there is a declining gap between water and sewer connections. Ninety-seven percent of the population is connected to drinking water networks (Authors’ elaboration). The connection rate to the sewer system increased from 46% in 1990 to 74% in 2012 (Figure 3), with urban connection rates of 85% and rural rates of 47% (KSH 2015). Almost three-quarters of collected wastewater is treated at least at the secondary level (KSH 2015). State of Sector | Hungary Country Note | 5 DANUBE WATER PROGRAM equity of access to services. low-income households and vulnerable ethnic minorities have below-average access to services. ninety percent of the lowest quintile of households and 94% of the bottom 40% have access to piped drinking water, compared to the national average of 97%. Access to flush toilets is 87% for the bottom 40% (Authors’ elaboration). The majority of the Roma minorities are in the lowest quintile. 100% FIgURE 3: AcceSS To WATeR AnD SAnITATIon: 90% Total Total ToTAL PoPuLATIon, 80% 97% 93% BOTTOM 40% OF THE PoPuLATIon AnD PooR 70% E E: BMlFUW 2012B.RZS 2011 SoURcE: Bottom Bottom AND RZS 2012B. 60% 40% 40% 94% 87% 50% 94% 74% 72% 40% Poor Poor 30% 98% 98% 20% 10% 0% Piped water Public supply Flush toilet Sewer Wastewater treatment Service infrastructure. the water network is mature, while some upgrading is still needed for sanitation infrastructure. The drinking water network is complete, while wastewater network coverage stands at 74% (KSh 2015), and still growing, although at a slower pace during the last few years. Sewers on average are younger than water mains. The condition of drinking water treatment plants ranges from average to good, but in some municipalities additional treatment (especially arsenic removal) is needed, for which investment projects are underway. The sewage from all medium and large towns is treated to at least secondary level. Wastewater management of many small (below 2,000 p.e.) settlements still needs to be addressed. Value Value Year Source Water Wastewater UNDP/GEF DRP 2004 & number of treatment plants 846 663 2001 & 2014 TeSZIR 2015 Length of network [km] 65,532 42,885 2010 KSh 2015 Average connections per km of network 63 76 2010 KSh 2015 6 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Performance of Services Service Quality EU MS Danube Danube Indicator Year Source Value average average best Residential water consumption [liters/capita/day] 2013 KSH 2015 94 113 122 n.a. Water supply continuity [hours/day] 2013 Expert estimate 24 24 20 24 Drinking water quality [% of samples in full 2011 EC 2014 95 96 93 99.9 compliance] Wastewater treatment quality [% of samples in full 2013 Eurostat 2014 75 79 79 100 BOD5 compliance] Sewer blockages [number/km/year] 2007 IBNet 2015 7.41 3.0 5.0 0.2 Customer satisfaction [% of population satisfied 2013 Gallup 2013 77 78 63 95 with services] Quality of service. Water utility services standards are high. Water Exporting know-how service is provided 24/7 (Expert estimate) and drinking water quality The largest Hungarian drinking water service compliance is estimated to reach 95% (EC 2014). Where drinking water provider, the Budapest Waterworks, makes quality is problematic, alternative and temporary solutions are provided by use of its wide-ranging knowledge and water services (e.g., distribution of bottled water). Due to the overwhelming experience, including through international share of subsurface resources, however, several mineral elements partnerships. The company has projects exceed the mandatory thresholds. As a result, 40% of the settlements in, for example, Azerbaijan, Russia, Sri representing 25% of the population from time to time consume drinking Lanka, and Vietnam, in the field of project water with mineral parameters above the standards. These minerals are design and execution, modernization of arsenic, nitrogen compounds, iron, and manganese (KvVM 2010). Quality assets, IT solutions, and the corresponding improvement programs are in progress, and an official update on the training of local staff. Project organization, status of drinking water quality will be available after completion of the subcontracting, and setting up joint ventures second round of the National Water Basin Management Plan, due in 2015. are all viable forms of cooperation. Customer satisfaction. Most customers are satisfied with water services and water quality. While there are no nationwide domestic surveys on this topic, customers are primarily satisfied with service levels and drinking water quality. Seventy-seven percent of Hungarian citizens responding to the international Gallup survey responded that they were satisfied with the quality of drinking water, placing Hungary in the top countries surveyed (Gallup 2013). Efficiency of Services EU MS Danube Danube Indicator Year Source Value average average best Nonrevenue water [%] 2012 KSH 2015 24 34 35 16 Nonrevenue water [m3/km/day] 2012 KSH 2015 6.1 14 35 5 Staff productivity [water and wastewater] [number of 2012 Expert estimate 3.5 8.7 9.6 2.0 employees/1,000 connections] Staff productivity [water and wastewater] [number of 2007 IBNet 2015 1.7 1.0 1.6 0.4 employees/1,000 inh. served] Billing collection rate [cash income/billed revenue] [%] 2010 KvVM 2010 94 102 98 116 Metering level [metered connections/connections] [%] 2012 Expert estimate 99.7 96 84 100 Water Utility Performance Index [WUPI] n.a. Authors’ elab. 81 80 69 94 State of Sector | Hungary Country Note | 7 DANUBE WATER PROGRAM Overall efficiency. The overall efficiency of the sector is good, with significant variations across utilities. For most performance indicators, the water sector in Hungary displays above average performance in a regional comparison. Nevertheless, behind these average figures, there are notable variations of efficiency among utilities. Nonrevenue water reached 24% in 2012, or 6.1 m3/km/day (KSH 2015). This level shows good technical operational performance of services compared to other countries in the Danube region. However, nonrevenue water varies from 10% to 45% among Hungarian water utilities (KSH 2015). The collection ratio is estimated at 94%, which indicates that utilities are able to collect invoices from customers, thus generating revenues (KvVM 2010). Moreover, the average number of staff per 1,000 connections is low at 3.5 (Expert estimate). This is among the best practice observed in the countries of the Danube region, but it varies from 2 to 10 across the sector. Recent trends. At present, there are no clear trends in efficiency changes. After major improvements during the 1990s and the beginning of the 2000s, the performance of water utilities in Hungary levelled off for the last 5 to 10 years. Nonrevenue water expressed in percent remained stable between 2001 and 2012, while nonrevenue water expressed in m3/km/day decreased by 9% over the same period (KSH 2015). The collection ratio also remained stable over the last 10 years, and no significant improvement has been noticed. The metering level has steadily increased since 2001 to nearly 100% today (Expert estimate), while water consumption per capita decreased by 6%, from 100 l/capita/day in 2001 to 94 l/capita/day in 2012 (KSH 2015). The number of staff per 1,000 connections has steadily and slowly decreased over the last decade (Figure 4), allowing a reduction in the operating costs of utilities. Small utilities are generally of lower efficiency than larger ones. After the ongoing mergers of the water utility reform process, the average efficiency figures are expected to further improve. 4.4 Figure 4: Average staff per 1,000 connections in Hungary 4.2 Source: Expert estimate. 4 3.8 3.6 3.4 3.2 3 2005 2006 2007 2008 2009 2010 2011 2012 8 | The Danube Water Program | WB & IAWD 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. 86 101 62 n.a. Overall sector financing [share of GDP] [%] Authors’ elab. 0.51 0.55 0.45 n.a. Percentage of service cost financed from tariffs Authors’ elab. 76 65 67 n.a. Percentage of service cost financed from taxes Authors’ elab. 5 10 12 n.a. Percentage of service cost financed from Authors’ elab. 19 25 22 n.a. transfers Service Expenditure Average annual investment [share of overall Authors’ elab. 15 42 38 n.a. sector financing] [%] Average annual investment [€/capita/year] Authors’ elab. 13 42 23 n.a. estimated investment needed to achieve targets 2007-2013 KvvM 2010 32 65 43 n.a. [€/capita/year] of which, share of wastewater management [%] Authors’ elab. 70 64 61 n.a. Overall sector financing. O&M costs are financed FIgURE 5: OVERALL UTILITy SECTOR FINANCING IN 2012 mainly through tariffs and new investments through 100% Transfers Investment external grants (Figure 5). Government subsidies 19% 15% 90% are available to support the tariffs of municipalities where service costs are above a threshold level that is 80% Taxes (national) determined each year. Reconstruction work is usually 5% 70% financed through tariff revenues, but since water and sewerage tariffs were frozen and then decreased 60% Tariffs (national) O&M by law, funds to support reconstruction have been 76% 85% 50% falling. new large-scale investments, such as network expansion, advanced drinking water treatment 40% (especially to treat arsenic and other location- 30% specific pollutants), and wastewater treatment plant construction and upgrades are financed mainly from 20% eu and government funds. 10% The main sources of funding of water and wastewater 0% utilities are described in Figure 6, using the OECD three Financing Spending Ts methodology (tariffs, transfers, and taxes). E SoURcE: E: AUtH t oRS’ El tH E ABoRAtI t oN. tI investment needs. investment needs are mostly met with available funds. The funds needed for new investments to meet EU obligations are more or less available from EU and government sources. Funds for reconstruction and rehabilitation of existing assets are declining, and their level is no longer sufficient. According to the National Water Basin Management Plan, about €1.7 billion should be invested from 2014 to 2027, with 30% going toward water projects and 70% toward funding wastewater investments. This represents around €32/capita/year. (KvVM 2010) investments. Most investments are related to fulfilling EU directives obligations. Total investments planned in the water sector for 2007–2013 amounted to €2.7 billion, more than 90% of which was financed by EU funds. In 2014, less than half of this planned investment allocation had been spent, which represented an overall effort of €1.35 billion State of Sector | Hungary Country Note | 9 DANUBE WATER PROGRAM FIgURE 6: MAIN SOURCES OF FUNDING OF WATER & WASTEWATER SERVICES EU funds State budget Fiscal transfers (infrastructure development) Subsidies (for Transfer disadvantageous Taxes, fees & fines settlements) Rent for infrastructure Water and wastewater Local govrnment budget utilities Tariff National taxes Consumers and polluters E: AUtH E SoURcE: t oRS’ El tH tI t oN. E ABoRAtI (average of around €13/capita/year over the period). Ninety-one percent of these funds were spent on wastewater investments and 9% on drinking water projects (Figure 7). The remaining €1.35 billion is to be spent in the coming years for projects already underway. FIgURE 7: EVOLUTION OF INVESTMENTS LEVELS, SOURCES, AND USES 200 150 Investment (M €) 100 Source: International Source: National 50 Source: Subnational Use: Water 0 Use: Sanitation 2007 2009 2010 2011 2012 E E: AUtH SoURcE: tH E ABoRAtI t oRS’ El t oN. tI 10 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM Cost recovery and affordability EU MS Danube Danube Indicator Year Source Value average average best Cost Recovery Average residential tariff 2012 KSh KS 2015 2.43 2.18 1.32 n.a. [incl. water and wastewater] [€/m3] Operation and maintenance unit cost [€/m3] Authors’ elab. 2.28 1.77 1.20 1.20 operating cost coverage 2011 expert estimate 0.89 1.10 0.96 1.49 [billed revenue/operating expense] Affordability Share of potential WSS expenditures over 2012 Authors’ elab. 2.9 3.1 2.6 n.a. average income [%] Share of potential WSS expenditures over 2012 Authors’ elab. 4.2 4.7 3.8 n.a. bottom 40% income [%] Share of households with potential WSS 2012 Authors’ elab. 18.9 24.7 14.1 n.a. expenditures above 5% of average income [%] Cost recovery. operating costs are generally not recovered, and tariffs electricity purchase are not sufficient to fund asset renewal. The Act 209/2011 on water utility To reach a lower electricity price through services requires full cost recovery in accordance with the Water Framework higher volume of purchase, some water Directive. however, since the government decree on tariff setting has not been utilities bundle their electricity purchases adopted yet, detailed requirements on tariff setting are unknown. under current from the competitive market. Previously, practice, operating costs are not recovered, and some utilities need to scale they acquired electricity individually; now, back on specific cost items (such as maintenance), which may be detrimental they enter the market together. A larger to long-term service quality. The average operating ratio in the sector is 0.89, total purchase volume is attractive for but a wide variability is observed among utilities, with ratios ranging from 0.5 electricity traders, making it possible to 1.2. Moreover, the indicator value started to decrease by 5% to 10% between to provide lower rates to utilities. Some 2011 and 2014, due to the government decision to freeze tariffs and then utilities used auctions to effectively lower reduce them (expert estimate). household tariffs in municipalities facing unit the price. Mezőföldvíz Kft., for example, service costs above a threshold value are eligible to receive subsidies from used a decreasing price auction to the central government. Such a mechanism does not encourage utilities to contract for its 2014 energy needs and improve their efficiency. These subsidies represent about 2% of the overall tariff achieved a purchase price 10% below the revenue of the sector. regular market price. FIgURE 8: EVOLUTION OF AVERAGE TARIFF (ABSOLUTE AND SHARE OF POTENTIAL ExPENDITURE IN HOUSEHOLD INCOME) 1.4 5% Water 4.2% 1.2 Wastewater 4% Average tariff (€/m3) 0.8 1 3% 2.9% 0.6 2% 0.4 1% 0.2 0 0% 2000 2002 2004 2006 2008 2010 2012 Average Bottom 40% tIMA t SoURcES: ExPERt EStIMAtE t AND AUtH t oRS’ El tH E ABoRAtI t oN. tI State of Sector | Hungary Country Note | 11 DANUBE WATER PROGRAM Tariffs. After a substantial increase in real terms during the 1990s and 2000s, water and wastewater tariff evolution followed inflation for the last 7 years. Between 2001 and 2008, water and wastewater tariffs doubled, on average (Figure 8). But between 2008 and 2014, they remained stable following the inflation evolution. Water tariffs paid by commercial entities are higher than household tariffs, since the act on water utility services allows cross- subsidies between users, with the possibility of commercial tariffs being 150% higher than household tariffs. Affordability. The affordability of water and sanitation is an issue for the low-income population, including marginalized minorities. In 2012, the share of the potential cost of water in the average household budget was close to 3% (Authors’ elaboration). In the bottom 40%, this share amounted to 4.2%, even though their average consumption was only 70% of the average household (Authors’ elaboration). In the poorest 10 subregions (the administrative level below counties), this value reaches 10% (KvVM 2010). Low-income minorities are in a very disadvantaged position, often lacking direct access to piped drinking water. 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 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 Hungary’s water sector are displayed in Figure 9, which also shows average and best practices in the Danube region. The Hungarian sector sustainability score is 74, which is far above the Danube average sustainability of 64, and is among the best practices in the region. The assessment shows that, on average, the country performs well in terms of continuity of access to piped water and flush toilet, collection ratio, nonrevenue water and staffing level. The main deficiencies of Hungary’s water sector identified through the sector sustainability assessment are the operating cost ratio, affordability, and investments (Figure 9).. Financing Access Figure 9: Sector Maturity Assessment, Hungary Piped water Investment Flush toilet Source: Authors’ elaboration. Wastewater treatment Affordability coverage Operating Customer cost ratio satisfaction Non revenue Continuity water of service Staffing level Wastewater Hungary compliance Collection ratio Danube average Eficiency Quality Danube best practice The main sector challenges are: XXAchievingfull cost recovery. Many of Hungary’s water utilities have carried out EU and government-sponsored investments over the last few years. As a result of the financing agreement, the depreciation of these investments 12 | The Danube Water Program | WB & IAWD DANUBE WATER PROGRAM must be covered by tariffs (that is, the part of the tariffs not subject to the tariff freeze and cut), but the costs necessary for maintenance or the additional cost of operation can no longer be added to the tariff base. Thus, a growing inventory of assets needs to be maintained, with shrinking resources for maintenance. Moreover, since water and sewerage tariffs were frozen in 2012, and decreased by law in 2013, revenues collected by utilities are decreasing. XXPreventing the degradation of assets in the longterm. While assets of most water utilities have been properly maintained during the last two decades, few companies made efforts to create sufficient reserves for their future replacement. As a result, the infrastructure is aging and its average condition is slowly declining. The quality of service continues to be good, so the threat of asset decline is not immediate. Due to the 2013 tariff cut, utilities have accumulated even lower reserves than before, and maintenance has become problematic for many operators. Without external support from government grants for investments or an increase in tariff revenues, the trend of asset decline does not seem reversible. XXPreparing for the risks caused by climate change. Most water utility managers are aware of the types of risks caused by climate change (such as new patterns of precipitation, stress on sewerage, changing patterns of water consumption, and change in water resources used for drinking water), but the everyday challenges of maintaining a high level of operation under worsening financial conditions make it difficult to focus on the long term. While the companies have strategic plans, climate change is rarely addressed in them, and risk management systems are usually not in place within the utilities. Sources XXEC. 2014. Synthesis Report on the Quality of Drinking XXKSH.2014. Environmental Report 2013. Budapest: Water in the EU Examining the Member States’ Reports Hungarian Central Statistical Office. for the Period 2008-2010 under Directive 98/83/EC. XX—.2015. Hungarian Central Statistical Office. Accessed Brussels: European Commission. 2015. http://www.ksh.hu. XXEurostat. 2014. European Commission Directorate- XXKvVM. 2010. National River Basin Management Plan. General Eurostat: Statistics Explained - Water Statistics. Budapest: Hungarian Ministry of Environment and Accessed 2015. http://ec.europa.eu/eurostat/ Water. statistics-explained/index.php/Water_statistics. XX TESZIR. 2015. Hungarian Municipal Wastewater XXFAO Aquastat. 2015. Food and Agriculture Organization Information System. Accessed 2015. http://www.teszir.hu. of the United Nations - AQUASTAT Database. Accessed XXUNDP/GEF DRP. 2004. Assessment and Development 2015. http://www.fao.org/nr/water/aquastat/data/ of Municipal Water and Wastewater Tariffs and Effluent query/index.html?lang=en. Charges n the Danube River Basin. Volume 2: Country- XXGallup. 2013. World Poll. Accessed 2015. http://www. Specific Issues and Proposed Tariff and Charge gallup.com/services/170945/world-poll.aspx. Reforms: Hungary - National Profile. New York City: XXGov. HU. 2015. Hungarian Government. Accessed 2015. United Nations Development Programme/Global http://www.kormany.hu/en. Environment Facility - Danube Regional Project. XXGVI.2013. The Socio-Economic Profiles of the Hungarian XXWorld Bank. 2015. World Development Indicators. Regions. Budapest: Institute for Economic and Accessed 2015. http://databank.worldbank.org/data/ Enterprise Research. views/reports/tableview.aspx. XXIBNet. 2015. The International Benchmarking Network for Water and Sanitation Utilities. Accessed 2015. http:// www.ib-net.org. XXICPDR. 2015. International Commission for the Protection of the Danube River. Accessed 2015. http:// www.icpdr.org. Hungary 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