World Water Crisis (LIFE)

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Developing Wastewater Services in Emerging Market Economies: The Cases of China and Ukraine
John Bachmann, PADCO
http://www.cd3wd.com/cd3wd_40/ASDB_SMARTSAN/Bachmann.pdf
http://www.padco.aecom.com
[e-mail]
Delivering affordable, dependable and sustainable wastewater services is a challenge for
local governments worldwide. But it is an especially tall order in emerging market
economies, in which the old service norms, institutional forms and pricing policies often
constrain the development of autonomous and competent wastewater service providers that
can develop their systems to meet users’ needs and collect sufficient revenues to cover their
costs.
China and Ukraine are two countries that are wrestling with the problems of developing
sustainable wastewater collection and disposal services while their economies transition
toward the market. This paper examines the performance of local governments and their
Wastewater Service Providers (WASPs) in selected towns in both countries and seeks to
identify the factors that contribute toward improving service quality and achieving financial
sustainability.1 The goal of the analysis is to draw conclusions that may be applicable to
WASPs in other emerging market economies.
The paper will examine in turn three aspects of wastewater service delivery — institutional
arrangements, service pricing and stakeholder participation — in each of the two countries.
For each aspect, the paper will briefly define the Chinese and Ukrainian contexts and identify
the main problems faced by WASPs and local governments (LGs). A final section will
attempt to draw conclusions about the types of interventions that could be successful in
promoting improved service delivery in the future.
Institutional Arrangements for Wastewater Service Delivery
In both China and Ukraine, wastewater service delivery is a devolved function for which local
governments are responsible. Ukraine’s law “On Local Government” of 1996 makes LGs
responsible for the provision of a number of “communal services,” including piped
wastewater collection and disposal. Most LGs execute this official mandate through
“vodokanals,” which are legally independent organizations that are nominally owned by the
local community (residents of the town or city) but in practice operate under the direction of
the local government. (A minority of vodokanals or their fixed assets are leased to private
companies.) Vodokanals are generally responsible for water supply and piped wastewater
collection and disposal.
Chinese towns are also responsible for the delivery of local wastewater services. In small
cities and towns, services are usually provided by a municipal department, often operating
independently from the water company, a municipally owned utility. In large cities,
wastewater collection and disposal services are generally carried out by municipal
departments or LG-owned water/wastewater companies.
The broad outlines of the institutional arrangements in both countries are favorable to
responsive, sustainable wastewater service delivery to the extent that local governments can
design and implement their own programs. However, the specific roles and responsibilities of
1 The material in this paper is drawn from two technical assistance projects implemented by Planning and
Development Collaborative International, Inc. (PADCO): the ADB-financed “Town-Based Urbanization Strategy
Study” (TA 4335-PRC) implemented China in 2004-2005, and the USAID-financed “Ukraine Tariff Reform and
Communal Services Enterprise Restructuring Project” implemented in 2000-2005.
the WASPs are insufficiently defined, and there are few incentives for WASP managers and
staff to improve institutional performance and/or service quality.
In the Chinese case, the operational environment for wastewater delivery is first and
foremost undermined by the political imperatives of local government leaders. In recent
years, the Government of the People’s Republic of China (PRC) has put heavy emphasis on
economic growth. Local government leaders — both in the Party and the town or city
government — are evaluated based on the amount of new investment they leverage and the
increase in local economic output. Prospects for promotion within the party and to larger
urban settlements will depend first and foremost on economic growth. The degree of
environmental sustainability of local growth is not an evaluation criterion. These political
priorities do not incentivize improvements in urban environmental infrastructure generally or
in wastewater service delivery in particular. On the contrary, many officials are driven to
undertake any investment project that will boost growth, regardless of its impact on the
environment.
Another constraint in Chinese towns is the dependence on decision-makers at higher levels
of government in order to improve wastewater services. Large capital investment projects
and tariff increases require approval of higher-level governments, such as a county, countylevel
city or prefecture-level city.
Finally, the performance of many Chinese WASPs is undermined by their separation from
water service providers. It is much more effective to bill customers for wastewater and water
supply services at the same time (through the same bill), given that willingness-to-pay for
water supply is always higher than willingness-to-pay for wastewater collection. The fact that
water suppliers are able to disconnect their customers in case of non-payment also
contributes to higher payment collection rates, which benefit wastewater service providers
also when billing is combined.
Unlike their Chinese counterparts, Ukrainian local have the authority to set tariffs for
wastewater services delivered by vodokanals (communal service enterprises) without
higher-level approvals. The vodokanals calculate the tariffs and make a proposal to the LG,
which approves the tariff by action of its executive committee. While the autonomy afforded
by this arrangement is an asset, it also subjects the pricing of wastewater services to the
vagaries of local government politics in an emerging democracy. Many Ukrainian mayors
feel that raising the prices of communal services will lower their chances of being reelected.
The old notions of water as a public good that the State should provide for free run deep in
Ukrainian society, especially among older people and pensioners, which make up a large
portion of the total population. It takes a progressive local government leader to decide that
raising tariffs is either (i) the right thing to do for sustainable service delivery, despite its
unpopularity, or (ii) can be fashioned into a political asset by emphasizing improvements to
service coverage or quality.


Economic growth continues to trump environmental protection in Chinese towns.

In both Ukraine and China there is a general lack of clarity about the roles and
responsibilities of WASPs vis-à-vis municipal owners and end users (customers). There are
few written agreements between local governments and wastewater service providers
specifying the responsibilities of the wastewater service provider with respect to service
levels, capital investment financing, and service pricing (tariffs). The obligations of the local
government — in effect, the LG’s contribution to improving wastewater services — are also
underarticulated: there is no specific commitment by the municipality to provide financing for
improvements, build public support for increasing payment collection, or approve necessary
tariff increases. At the same time, there are no contractual agreements between WASPs and
end users. In this operational environment, the wastewater service provider lacks clear
targets to work toward and clear commitments from the city and customers to assist in
achieving institutional and sector objectives.
Pricing of Wastewater Collection and Disposal Services
At its best, the pricing of urban services such as wastewater collection and disposal is a
complex, interdisciplinary and flexible exercise through which interested parties set prices to
achieve a set of often conflicting objectives. On the one hand, user charges should be
affordable to customers. On the other hand, tariffs should be set to ensure the level of
revenue needed to keep providing decent services in the future. Where fixed assets require
rehabilitation or coverage must be expanded, tariff revenues may have to cover capital
investment costs too. In a successful service development planning and tariff setting
process, the different parties work together to find common goals and then formulate
interventions to achieve them.
Such a “holistic” view of the tariff setting process is not yet widespread in Ukraine. In the
1990s, most municipalities, despite being responsible for service pricing, distanced
themselves from this process in order to limit perceived political damage. Cities would posit
themselves as the arbiter of the tariff setting process, a role that assumes conflicting views
among vodokanals and customers. Generally siding with the customers in order to
strengthen their position for future elections, municipal governments would generally reject
tariff increases proposed by vodokanals, thereby locking the WASPs into a downward spiral
of aging assets, rising energy costs and financial shortfalls.
Wastewater service pricing in China is also influenced by the notion of water supply (and by
association, wastewater) as a public good to which all citizens are entitled. Local
government leaders are wary of raising water and wastewater tariffs, which are consequently
below the level required for recovery of operation and maintenance (O&M) costs in most
towns.
In cities in China and Ukraine, extensive capital investment is needed to ensure adequate
future service delivery. In China, it is necessary to expand coverage of piped wastewater
collection services in response to rapid urban development and to build appropriate
wastewater treatment facilities. Ukrainian municipalities need to rebuild pumping stations
and treatment plants to reduce energy consumption and lower energy costs; moreover,
much of the aging piped network needs replacement.
Under the principle that the customer should bear as much of the cost of service provision as
possible, WASPs in both countries should calculate new tariffs that cover O&M costs and
whatever share of investment costs the end user can bear. This calculation requires
knowledge of household income and expenditures. Ability-to-pay analysis was carried out
under the USAID-financed Tariff Reform and Communal Services Enterprise Restructuring
Project in two Ukrainian cities (Lutsk and Khmelnytsky) to evaluate the impact of alternative
hypothetical tariff scenarios on household finances. The analysis concluded that there was
additional disposable income, and that it would be possible to raise water and wastewater
tariffs without surpassing the normative “15% limit” set by the local governments: combined
housing and communal services costs should not exceed 15% of the income of a household
at the 25th income percentile.
On the basis of this analysis and extensive stakeholder consultation, the City of Lutsk
decided to increase its water and wastewater tariffs by 32 percent in June 2002. In
combination with increased payment collection, the higher tariffs provided enough revenue
to cover O&M costs and finance a modest $500,000 short-term capital investment plan.



Following on the Lutsk experience, three-quarters of the 29 communal service enterprises
that graduated from the Tariff Reform Project over the period 2002–2005 achieved cost
recovery through a combination of tariff increases, higher payment collection rates and
operational cost reduction (27 enterprises were loss-making at entry into project).
Municipal public works departments and wastewater companies in China also desperately
need to raise tariffs in order to generate financing for the construction of wastewater
treatment plants. But there is no standard methodology for calculating tariffs that include a
component for O&M and another component for capital investment. And ability-to-pay
% Payment Collection, Residential Customers
35
45
55
65
75
85
95
2000 2001 2002
Khmelnytsky Vodokanal
Khmelnytsky Heat
Lutsk Vodokanal
Lutsk Heat
analysis is not used to systematically evaluate the capacity of customers to pay more.
Perhaps most critically, there is no established public forum in which packages of service
improvements and pricing options could be discussed and agreed with customers and other
stakeholders in Chinese cities in towns.
Stakeholder Participation in Wastewater Service Delivery
The Government of the PRC is currently pursuing a goal of creating a “harmonious society”
in which the benefits of growth are equitably distributed among different population groups.
Equitable distribution of the benefits of urban development requires dialogue among the
various concerned parties: local governments, real estate developers, holders of use rights
to land, buyers of newly created real estate products, and users of wastewater and other
municipally provided services. In China today, however, customers do not have a voice in
the provision of urban services. Decisions about service levels and coverage in many cities
are taken primarily based on engineering requirements and the availability of capital
investment subsidies from higher-level governments. There is no systematic consultation of
different population groups, and end user preferences and priorities are not incorporated into
the service planning and pricing process.
The investment requirements of Chinese towns and cities in the area of wastewater
treatment are staggering. If the current trend in environmental degradation of surface and
ground water supplies is to be halted, thousands of urban settlements across the country will
need to build wastewater treatment facilities. Under current conditions — an unfunded
mandate to provide services coupled with insufficient authority to increase tariffs — it would
seem difficult for Chinese WASPs to respond to the challenge. Any successful approach to
improving service levels will have to be multi-pronged, but one important aspect is likely to
be improving relations with stakeholders: the users of wastewater collection and disposal
services. In the respect, the recent experience of Ukrainian cities may prove instructive.
In the 1990s Ukraine adopted a representative democratic form of government in which
executive and legislative officials are elected at the local government level. This system
requires some degree of responsiveness to the priorities of the public on behalf of local
mayors and council deputies. But as described in the service pricing section above, elected
officials have in many cases acted as arbiters rather than leaders in the area of urban
services provision. This is now changing. Town halls in such cities as Komsomolsk,
Chernigiv, Kalush and Lutsk have forged partnerships with their communal service
enterprises (including vodokanals) and the local stakeholders.
Where such partnerships have been forged, the parties have been able to agree on and
implement substantial improvements in service delivery and sustainability. The process in
most towns has followed this general outline:
1. Build customer awareness. Conduct public outreach and carry out media campaigns to
educate the public about the need to rehabilitate or expand wastewater systems, to increase
revenues in order to pay for improvements, and to pay for services in order to ensure the
financial viability of vodokanals.
2. Gather information on customer preferences and priorities. Conduct focus groups and/or
customer surveys to find out what customers see as the major problems, what types of
service improvements are most important to them, and whether they are willing to pay more in
user charges in order to receive better services.
3. Formulate proposals that respond to customers’ stated priorities. In the process of service
planning and capital investment programming, include the projects and operational changes
that will improve coverage, improve wastewater treatment, protect local rivers and streams,
etc. Formalize these proposals into strategic action plans.
4. Garner public support for the strategic plans. Publicize the plans by distributing summary
versions of them, posting them in public places for review, and holding public hearings on the
plans.



Public hearings in Ukraine are used to build stakeholder support for wastewater
services reform.
Participants in focus groups and public hearings can be presented with different
technical/pricing options that have different sets of capital improvements associated with
them. Each option or scenario is presented as a package; for example, achieving 24 hour a
day water supply (from scheduled delivery) will necessitate a 20% tariff increase, while 24/7
water and higher water pressure above the second story will entail a 30% increase.
Participants should be able to evaluate the costs and benefits of each package themselves,
and contribute their opinion to the decision-making process.
Conclusions
This brief review of the wastewater sector in Chinese and Ukrainian towns indicates that
there is great scope for refining and improving institutional arrangements, pricing policies
and stakeholder participation. The following concrete recommendations are set out for
consideration by policy-makers and practitioners in emerging market economies.
• Reinforce the legal and regulatory basis of WASPs so that they can establish technical
service targets, plan capital investments and set prices in collaboration with local
governments and stakeholders;
• Develop and implement service agreements in which the rights and responsibilities of local
governments and WASPs are clarified. Local government commitments to achieving service
delivery targets must be spelled out clearly;
• Get the incentives right for improved performance of WASPs and LGs. Link improvements in
wastewater services and environmental protection to the career advancement among civil
servants and elected officials.
• Unite the entities responsible for water supply and wastewater collection into a single
organization responsible for both services. This will improve service planning and facilitate
tariff payment collection;
• Use ability-to-pay analysis to determine how much local households can afford to pay for
improved wastewater services;
• Use customer outreach techniques such as focus groups and customer surveys to determine
end user preferences and priorities with respect to wastewater service levels and coverage.
• Develop a tariff calculation methodology that includes a capital investment component.
• Develop and evaluate alternative capital investment and tariff scenarios with input from
stakeholders;
• Build consensus for a preferred option or scenario through information dissemination and
public hearings.
• Implement the strategic plan.