Factors and challenges of regionalization in the water and wastewater sector

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Factors and challenges of regionalization in the water and wastewater sector
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  FACTORS AND CHALLENGES OFREGIONALIZATION IN THE WATER ANDWASTEWATER SECTOR  Author  ∗  : Simona FRONE   Abstract . This paper investigates some general issues related to the opportunity of regionalization, involving the aggregation of several towns for the provision of drinkingwater and wastewater services, as well as some particular features and challenges of the process in Romania. The main driver for the aggregation/regionalization of utilities is usuallythe potential to realize economies of scale by providing services to a larger customer baseand at a lower cost, also increasing the size and efficiency of new investments by sharinginfrastructure projects and accessing international funding.  Key words:  Regionalization, aggregation, water supply and wastewater services  JEL Classification : L95, L25, H54 1. Factors for the aggregation and regionalization of water supply andwastewater services A regional public water supply and wastewater utility represents the entiretechnological, operational and managerial system resulted from the combination of two ormore local drinking water supply and wastewater systems. The main objective in creatinga regional drinking water and wastewater system operator is to optimize the performanceof the operations and quality of supplied services, by using joint resources and facilities.Therefore, the process of regionalization consists in concentrating and integratingthe services rendered by a group of administrative-territorial units. The new regional unitcovers a certain geographical area delineated by a hydrographical basin and/oradministrative boundaries. It is also a strategic guideline that the regional operation of water supply and wastewater services should be performed in an area covering at least ∗  Simona Frone, Ph.D., Senior Researcher, Institute of National Economy, Romanian Academy, e-mail:simona.frone@hotmail.com.    100,000 population equivalents and as much urban agglomerations in a county orhydrographical basin as possible.For the purpose of regionalization, the aggregation may be defined as thegrouping of several municipalities into a single administrative structure for the regionalprovision of a particular service.Generally, these aggregated structures vary along three dimensions:1.   the scale : Aggregated structures can group two neighboring municipalities, orseveral municipalities in a single region or across a broader territory;2.   the scope : Aggregated structures can provide a single service (for example, bulk water supply) or all services, from raw water abstraction to sewerage treatment;3.   the process : Municipalities may form aggregated structures voluntarily based onmutual interests; alternatively, a higher level of government, driven by theoverall public interest, may impose or stimulate the aggregation process.The aggregation/regionalization of water utilities does not take place very oftensince it has a relatively high risk of failure when political will is lacking, the potentialbenefits are not clearly understood, or the regionalization process is perceived as toocomplex.Water systems reforms such as aggregation and regionalization are usuallyconsidered when there are perceived inefficiencies in the management of water supplyand sanitation (WSS) services, either because service providers are too small to providean efficient service and/or since former decentralization of public services has led to avery fragmented water sector.The main factors driving the consideration of aggregation (regionalization) andthus increasing the water utility’s size include: •   Increased efficiency through economies of scale •   Access to water resources and integrated water resources management •   Broader former decentralization processes •   Enhanced professional capacity in larger scale of operation •   Access to finance or/and to private sector participation •   Cost sharing between higher- and lower-cost service areas.These main factors driving the aggregation/regionalization process of reform of drinking water and wastewater services (as represented in Figure 1) may be consideredalso potential benefits, as we shall focus more in detail below.    Figure 1 - The process of aggregation and regionalization of water utilitiesa) Increasing efficiency through economies of scale Usually the main factor driving the aggregation/regionalization of utilities is theneed to improve efficiency of service provision, since small-town water services are ofteninefficient because they are too small to access certain services or cannot realize the fullbenefit of the infrastructure. The major motivator is therefore to generate economies of scale to share total production costs over a larger demand base and reduce the unit costsof production.From the point of view of operating water services, it would therefore be importantto identify the “optimal size” of service provision. Such an exercise is a difficult one,however, because results depend on the specific circumstances of each water service andmany factors can impact on the relative efficiency of different services (employmentrules, access to international markets, topographical conditions, water availability etc.).Although there is evidence of economies of scale, it has often been difficult to quantifythem precisely or to identify at which point economies of scale start tailing off because of inefficient production size. MunicipalityAMunicipalityBMunicipality CMunicipalityDAGGREGATION and REGIONALIZATIONRegional Aggregated Service Provider(ROC)Economies of Scale; Efficiency; Accessto Finance; Access to PSP; Cross-Subsidization; IWRMStrong Sustainable Regional WaterUtility Small Municipal Water Utilities DECENTRALIZATION    There are still some quite recent international studies and research papers aiming tofind out whether there is or not a significant link between the size and the efficiency of water utilities. For instance, earlier econometric research (Garcia and Alban, 2001) usingdata from high-income countries   concluded that water providers may operate cost-effectively through a range of sizes, with even small utilities facing economies of scalethat can be significant.A more recent study (Tynan and Kingdom, 2005) has more interesting outcomessince it provides a first look at the link between a provider’s size and its unit costs usingdata from low-, middle-, and high-income countries. This econometric research assessesthe economies of scale facing water and sanitation providers, by investigating operatingcosts as a function of the size of the company, using several different specific indicators(measures) of the size. It shows eventually that water utilities could reduce per-customeroperating costs by increasing their scale of operation.This study showed that a relatively consistent scale factor is around 0.8, whichmeans that a doubling in output would lead to an 80 percent increase in costs. Mostimportant, and in agreement with other studies previously carried out, it showed thatevidence of economies of scale (when increasing their size) is much stronger for smallerutilities (serving less than 125,000 people) than for larger ones, for which economies starttailing off.The main conclusion is that neighboring small water services providers may beable to lower customer costs by merging and operating as one larger regional utility. TheRegional Operating Company will therefore gain in profit and be able to sustain furtherinvestments and development of water infrastructure, since there are potential reductionsin investment costs from a more efficient scale. b) Access to water resources and/or integrated water resources management  The need to improve access to water resources, because of unequal access to waterresources by different localities within a region or country can be a strong driving factorfor the regionalization. Alternatively, managing water resources at a higher level than themunicipal level may be required because of overall water scarcity or unreliability, whichcreates the need for large bulk water supply schemes.The process of aggregation and regionalization may be pursued when the national(or regional) government seeks to implement integrated water resources management,whether to effectively allocate resources, to address environmental considerations, toimprove the efficiency of water resources management and/or to implement the WaterFramework Directive 2000/60/EC.    Early (since 1974), in England and Wales, high projected-demand growth rates andperceived pollution problems resulted in a central-government-led regionalization andaggregation of more than 200 water supply companies and 1,400 sewerage authorities into10 Regional Water Authorities (RWAs); they were simultaneously in charge of integratedwater resources management and water and wastewater service provision. The new waterauthorities’ coverage areas were determined based on river basin boundaries.To improve collection, treatment, and disposal of wastewater, aggregated regionalwastewater service providers can adopt a more comprehensive and better-suited approachthan isolated ones can. However, it is rare and maybe not advisable to create regional waterservice providers so big, based on river basin boundaries, since the above mentioned veryexample suggests that water resources management and service provision functions shouldbe better separated (in that case, the RWAs induced classic “poacher and gamekeeper”conflicts, so those functions were later split when private sector participation wasintroduced in English water services). c) Broader former decentralization processes and the aggregation It is a commonly held view that water services should be decentralized to the lowestpolitical level, i.e. the municipal level, to make them more responsive to the needs of thelocal population. However, experience has shown that a blind application of this principle isunsatisfactory because most small and medium-size towns lack the capacity to providebeyond a very basic level of public services. Increasingly, reports on the water sectorreform around the world observe that decentralization in the water sector may not yield allof its expected benefits without stronger governance skills at the local level and that small-town service providers would therefore turn to aggregation to overcome these drawbacks.Therefore, the aggregation/regionalization of water services may be the properchoice of small towns that have acquired increased powers and responsibilities because of decentralization and choose to aggregate to be able to carry out those responsibilitiesadequately. For example, in France, responsibility for water and sanitation services belongsto the country’s 36,000 municipalities, the majority of which are very small. Theseresponsibilities are beyond what many small municipalities can reasonably provide, andtherefore local authorities have increasingly turned to aggregation as a means to effectivelyprovide those services. d) Enhanced professional capacity in larger scale of operation The need for sufficient professional and skilled support is one of the most commondrivers for aggregation and regionalization of water utilities. Although small municipalitiesmay have sufficient capacity to carry out routine operating and management activities forwater services, they often lack capacity for more skilled activities (such as system planningand design, financial management, efficient procurement, advanced maintenance andrepairs, water-quality testing, and information technology).
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