Water – Investing Today for the Future Ninth EWA Brussels Conference

Károly Kovács Vice-president European Water Association

From Dynamic Cost Comparison (DCC) to cost-recovery assessment

– DCC Prime cost: the missing performance indicator –

13th – 14th November 2013, Brussels, Belgium

Full cost-recovery according to the EU WFD

New investments, option analysis, least cost solutions

Real value of the infrastructure

Effect of implementing infrastructure cost recovery

Potential indicator for Full cost-recovery

Topics

Full cost-recovery (FCR)

Water Framework Directive (WFD): 2000/60/EC Art.9.: „1. Member States shall take account of

the principle of recovery of the cost of water services, including environmental and resource cost, having regard to the economic analysis conducted according to Annex III, and in accordance in particular with the polluter pays principle.”

several questions arise about practical application of the FCR

principle (what, who, when, how…)

divers methodological approaches in the member states

incomparable, controversial results

no commonly accepted performance indicator

ongoing professional – scientific discussion in the EU

Questions: • What is stopping us putting a 'true value' on water services?

• What are the main reasons why economic and ecological perspectives have

not been fully integrated in river basin planning?

• How could the European Commission support the development of more consistent methodologies in order to better integrate economic and ecological perspectives into water management

EUROPEAN COMMISSION DIRECTORATE-GENERAL ENVIRONMENT Directorate C – Quality of Life, Water & Air ENV.C.1 - Water

"Linking Water Management and WFD objectives"

Exactly what costs should be fully recovered?

• most answers are theoretic… • major part cannot be expressed in monetary terms • non measurable • not objective • affordability?

Source: Assessment of full cost recovery pricing of water A project under the Framework contract Ref. No. EEA/IEA/09/002 – Lot 3

Task 2 Interim Report commissioned by the European Environment Agency, December 2012

EEA Cost recovery Report: Table 14 : Cost recovery levels

Country Cost recovery levels Year

Netherlands 99% (figure including all sectors, i.e.

domestic and business users including

farmers)

2010

France O&M costs: 100%

Investment costs: 15 – 95 % (Average:

55%)

Arcadis, 2012

Spain (Guadalquivir RBD) 49,78% 2005

Cyprus 51% Arcadis, 2012

Greece 54% Arcadis, 2012

Italy 20 – 30 % (South)

50 – 80 % (North)

Average: 50%

Arcadis, 2012

Source: Assessment of full cost recovery pricing of water A project under the Framework contract Ref. No. EEA/IEA/09/002 – Lot 3

Task 2 Interim Report commissioned by the European Environment Agency, December 2012

Table 12 Time changes in reported expenditures (as % of total expenditures) for selected water utilities

2005 2006 2007 2008 2009 2010 2011 2012

BWB (DE) Operating expenditure 62% 61% 61% 62% 62%

Env. Charges and taxes 9% 8% 8% 8% 8%

Capital expenditure 30% 31% 31% 30% 30%

BMO (FR) Operating expenditure 45% 41% 43% 51%

Capital expenditure 55% 59% 57% 49%

City of

Barcelona (ES)

Operating expenditure 51% 47% 54% 55% 45%

Capital expenditure 23% 23% 18% 17% 29%

Env. Charges and taxes 26% 30% 28% 28% 25%

Vitens (NL) Operating expenditure 58% 58% 57% 58%

Env. Charges and taxes 20% 20% 20% 19%

Capital expenditure 22% 22% 23% 23%

BW (UK) Operating expenditure 72% 69% 69% 70% 70% 71% 64% 61%

Capital expenditure 28% 31% 31% 30% 30% 29% 36% 39%

SW (SCT) Operating expenditure 46% 49% 47% 46% 46% 45%

Capital expenditure 54% 51% 53% 54% 54% 55%

???

Company Total length of pipes in km

Renewed or substituted pipes of these From 1990 to 1999, in km

Functional duration

Years expected

Anglian 8.191 131 562 Dwr Cymru 4.321 136 285 North West 10.674 338 284 Northumbrian 5.982 262 205 Severn Trent 7.471 411 163 South West 1.815 50 326 Southern 6.460 41 1.416 Thames 18.936 417 408 Wessex 2.841 97 263 Yorkshire 6.846 65 948 Total/All 73.537 1.948 486

Investments in wastewater pipes (infrastructure) Source: Waterwatch (www.waterwatch.org)

Proportion of reconstruction funds in water/wastewater tariffs: (amortization of utility assets/revenue from tariffs):

Hungary: <11%

Germany: 45%

Switzerland: 69%

Reconstruction ratio of networks and calculated period of full renewal (network reconstruction/lenght of network/year):

Switzerland: 1,9-1,0% 50-100 years

Germany: 1,0% 100 years

Hungary: 0,4-0,2% 250-500 years

Real renewal and reconstruction ratio of water infrastructure

Water investments in the CEE region

Total investments: ~ 8 billion €

~ 660 projects

+ increasing need for reconstruction

Number of projects

Croatia: 146Hungary: 223

Bulgaria: 120

Romania: 170

Source: International Conference on the Development and maintenance of water infrastructure in the CEE region with EU financing,

organized by Hungarian Wastewater Association and EWA , 6th April 2011, Budapest, Summarized data provided by lecturers

Available EU funds 2007-2013 programming

period, million EUR

Hungary: 2 022Croatia: 695

Bulgaria: 1 284

Slovakia: 1 077

Romania: 2 777

Current EU tendering procedures

EUROPEAN COMMISSION, Directorate General Regional Policy (July 2008): Guide to Cost-benefit Analysis of Investment Projects

(EU Guidelines)

Main method of project preparation: Cost-benefit analysis (CBA): methodological guidance in line with WFD, but…

• no detailed guidance on option analysis • in practice, short term financial interests are contradicting WFD

principles (sustainability, full cost-recovery etc.)

short term financial approach

sustainability, full cost-recovery

Goal: Improvement of the planning process of water investments in order to ensure sustainability and cost-efficiency

The DCC project

• 4+1 CEE countries + Germany • In line with EU (EBRD/EC) requirements, • Transfer of common knowledge • Adoptation to local circumstances

Dynamic Cost Comparison Calculation (DCC) for selecting least-cost projects in water supply

and wastewater disposal

Saving potential during the planning process

Conceptual plans, option analyses, feasibility study

Permission Tendering, implementation,

max. ±10%

Tender design

100%

abili

ty t

o in

flu

en

ce c

ost

s

time

• Full life cycle approach • Dynamic approach • Real term thinking • Interdisciplinary approach • Schematization of the calculation process • In line with national and EU regulations • Considers all cost! (inv., repl., O&M, res., env.)

The method of Dynamic Cost Comparison Calculations (DCC)

Main characteristics of DCC:

A1: Gravity sewerage system

EUR 1.832.000

14.500 EUR/a

0 5 10 15 20 25 30 35 40 45 50

time (a)

A2: Pressure sewerage system

EUR 1.607.500 EUR 358.000

7.800 EUR/a

0 5 10 15 20 25 30 35 40 45 50

time (a)

Proper application of DCC in option analysis: • leads to the selection of the most cost-effective, optimum solution! • sustainability principle prevails throughout the whole decesion-making

process!

0

10

20

30

40

50

60

70

80

90

100

Real value loss of assets

Book value (Depreciation, 2%)

Real value of assets (HU)

Real value of assets (3%)

Real value of assets (5%)

Inflationary impact (HU)

Inflationary impact (3%)

Inflationary impact (5%)

Hungary (1990-2012) cum. inf.:

1200%!

Effect of implementing infrastructure cost recovery

16.2% 16.2%

4.0% 2.0%

16.0% 12.8%

5.0%

4.0%

16.0%

12.8%

10.0%

6.7%

25.0%

20.0%

7.0%

25.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Current cost structure (HU) Optimized cost structure

Cost structure optimalization

Independent costs* Profit after tax

Corporate income tax General and administrative expenses

Purchased water - Transferred wastewater Energy

Troubleshooting Maintenance

Amortization

Exactly what costs should be fully recovered?

• DCC method defines cost as real consumption of resources, goods and services.

• DCC considers all costs emerging during the whole life cycle:

investment cost replacement cost

O&M cost (resource costs, internalized external costs included)

Cost structure

life span

therefore DCC Prime cost represents exactly what should be fully

recovered by definition.

DCCC Prime cost: 1,3 €/m3

How to assess full cost-recovery?

specific revenue (tariff): 1,3 €/m3 = 100% cost recovery

DCCC: the potential methodology for the assessment of cost-recovery level DCCC Prime cost: the potential performance indicator

What is FCR? In short: All cost = All revenues…, but lots of questions arise about the practical application

Recomendations

Improve the project preparation by implementing DCC in option analysis

Actualise the value the existing infrastructure

Focus on the sustainability of the infrastructure

Introduce DCC Prime Cost as indicator for full cost-recovery

Thank you for your kind attention!

Károly Kovács

EWA Vice-president

kovacs.karoly@bdl.hu

Water – Investing Today for the Future Ninth EWA Brussels Conference

13th – 14th November 2013, Brussels, Belgium

Full cost recovery and DCC

Report on the Assessment of full cost recovery pricing of water, December 2012, commissioned by the European Environment Agency (EEA):

detailed, high quality study, but no methodology provided

Additional remarks on the report by EWA:

DCC recommended as a potential methodology

for the measurement of full cost recovery

Because:

• approach of DCC is in line with WDF

• Present value of project costs (PVPC) calculated by DCC = € what should be

recovered in total

• Dynamic prime cost (DPC) calculated by DCC = €/m3 what should be recovered

by specific tariffs