Water privatization in Bucharest

Various reports paint contrasting pictures of the situation before privatization. A publicly available internal technical report by the World Bank before privatization and a World Bank publication written for public dissemination after privatization differ in their assessment of when improvements occurred. According to the paper for the wider public, before privatization "water supply was intermittent, pressure was low, quality fell short of standards, and there were outbreaks of waterborne disease."^[1] According to the internal report, performance improved substantially between 1996 and 1999 before privatization under public management. Reported pressure problems decreased by 30 percent, complaints decreased by 20 percent, billing efficiency (the share of bills collected of the bills issued) increased from 80 to 92 percent, the share of metered residential connections increased from 50 to 91 percent, water availability increased from 12 hours to close to 24 hours per day, specific energy consumption decreased by 25 percent, and water losses – or more precisely non-revenue water – decreased from 45 to 35 percent, all before the privatization. The World Bank had supported the public utility through a US$25 million loan and evaluated the outcome of its project as satisfactory.^[2]

However, according to some estimates the system still needed more than US$1 billion in investment. Neither the municipality nor the national government was able to finance an investment of this size.^[1]

In August 1997 the municipal government decided to bring the city's water system under some form of private management and approached the International Finance Corporation (IFC), the private-sector arm of the World Bank Group, for advice.^[3] A permanent sale of assets was ruled out by the government. Instead various forms of public-private partnerships were considered, ranging from a short-term lease or management contract with little or no private investment to a long-term concession under which the private operator was to finance all capital investments. Under all options the ownership of the infrastructure was to remain with the municipality. The IFC was paid through a relatively small retainer fee and a success fee. The latter provided an incentive in favor of the concession model. It was to be highest, at US$2.5 million, if the privatization was in the form of a concession, lower if it was in the form of a lease contract, and lowest for management contract. The IFC advised in favor of a concession contract, which was accepted by the municipality.^[3] At the time it was also considered whether the service area should be split in two halves, with two contracts to be awarded to separate companies each serving one part of the city. This arrangement had earlier been applied in Paris and in Manila, in order to allow to compare the performance of the operators (benchmarking). In Bucharest the city opted for retaining a single service area. The city also decided that it would retain shares in the new company. It contributed its share through the transfer of its fixed assets.^[3] The municipal share in the company is variously quoted as 20 percent^[3] or 14 percent, compared to a level of 31 percent that had apparently been envisaged initially.^[4]

The decision to privatize was taken by the municipal council with a majority of 51 from 60 votes. In parallel, a public relations campaign was carried out in the media, based on analysis from surveys and focus group discussions, in order to win support for the privatization.^[3]

The selection of the private operator was carried out by the municipality, not by the national government. Only a single criterion was used to select the winning bidder among six short-listed companies: the lowest average water tariff over the 25-year concession contract. Three bids were received from Veolia (France), Suez Environnement (France) and International Water (UK). The bids were opened and evaluated on the same day in a public meeting in the presence of the media, allowing for a high level of transparency. The tender was won by Veolia which submitted an average tariff of only US$0.17 per cubic meter, with tariffs until year 16 discounted to their present value. This compared to an initial tariff of $0.18 per cubic meter.^[3] The water tariff submitted by Veolia was very low compared to other European countries. For example, the water and sewer tariff was seven times lower than in Athens ($1.34 per cubic meter) and more than 20 times lower than in Germany ($3.95 per cubic meter). In March 2000 the concession contract was signed between the municipality and the Veolia subsidiary Apa Nova București.

Apa Nova received concessionary financing from multilateral and bilateral development banks, including two loans for the new Crivina water treatment plant from the EBRD (EUR 55.4 m) and the German DEG (EUR 18.5m).^[5] Veolia also provided EUR 35 million in equity. The bulk of the US$340 million investments in the 2000–2007 period were, however, financed through commercial loans and, indirectly, by customers through the company's retained earnings.

Tariff adjustments compared to what was stipulated in the bid were possible only after the fifth year of the concession. They need approval from the National Regulation Authority for the Public Utilities Community Services, ANRSC. In addition, the contract foresaw the possibility to increase tariffs beyond the contractually foreseen increases, if total water use was more than five percent below water use in the previous year. This stipulation was included to reduce the risk of low water demand. This was considered a substantial risk given the unusually high water production of 800 liter per capita per day – more than six times the level in Germany – at the beginning of the concession.^[6][3]

The contract includes detailed standards for service quality and hefty fines for non-compliance. A performance bond had to be submitted which the municipality could draw if the company failed to pay the fines. Compliance with the 24 service quality indicators specified in the concession contract is controlled by AMRSP, the Municipal Authority for Public Services Regulation.^[6]

In 2007 Apa Nova Bucharest was considered one of the most profitable Romanian utilities, working with a 24 percent net margin. In 2006 it doubled its net profits to EUR 24 million compared to 2005.^[7] In 2010 the net profit was almost Lei 70 million (EUR 22 million), corresponding to a net profit margin of 17 percent.^[8]