Enhancing the Economic Regulatory System for Moldova’s Water Supply and Sanitation

Chapter 2. Moldova’s economic regulatory system for water supply and sanitation

Abstract

This chapter describes the economic regulatory system (ERS) for water supply and sanitation (WSS) in the Republic of Moldova (hereafter “Moldova”). This includes its legal and institutional frameworks, main actors and their competences, activity and capacity. It analyses the performance of the ERS, contrasting it with the demands on the system formulated in Chapter 1.

The chapter concludes with three scenarios that can help policy makers further develop Moldova’s ERS varying from addressing the shortcomings of the ER present system to taking step back to rethink the objectives of WSS policy, regulation and the roles of various stakeholders and eventually redesign the whole ERS. These scenarios were discussed at an Expert Meeting and at the National Policy Dialogue meeting held in November 2016 in Chisinau as part of the project.

Recent developments in the legal and institutional framework for WSS

During the past four years, the legal and institutional framework for water supply and sanitation (WSS) in the Republic of Moldova (hereafter “Moldova”) has improved. The country took important steps towards development of its economic regulatory system (ERS) for WSS. In 2013, Moldova adopted Law 303 on Water Supply and Sanitation. In September 2014, it nominated the National Energy Regulatory Agency of the Republic of Moldova (ANRE) as the competent regulatory authority for WSS. The new tariff methodology based on which all WSS utilities must prepare the tariff application was only published in February 2015 (Official Monitor no. 33-38 Article No: 258).

Local government remains the competent authority to approve the tariffs unless:

• local councils have delegated the right of approval to ANRE

• utilities operate under conditions defined in loan agreements with international financial institutions (IFIs).

However, ANRE shall consider and endorse all tariff applications. If local councils approve tariff rates at a lower level than ones endorsed by ANRE, the municipality shall compensate the operator for the difference.

Apart from the tariff regulation, several additional regulations have subsequently been issued. These so-called normative documents are required for completing the tariff applications. The final normati+ve document determines the eligible amount of non-revenue water (NRW) for tariff setting. This document was completed in mid-2016, almost two years after ANRE took responsibility as economic regulator. During this period, the sector was without an effective mechanism for setting new tariffs. Approval of 2015 tariffs was expected for several utilities towards the end of 2016, but as of March 2017 this had not yet happened. That could mean these utilities must wait another year or two for approval of the tariff adjustment. Once the tariff is approved for the initial year, operators can immediately file for adjusting tariffs for subsequent years, according to formulas in the tariff methodology.

Other ERS developments include implementation of the regionalisation process as recommended in the national WSS strategy. In practice, however, little progress has been made in the process, which depends on the voluntary co‑operation of many stakeholders. Also, the legal framework requires more development. “Soft” loans and cohesion fund financing were recognised as a key factor for the process in Romania, but the latter is not present in Moldova.

There is considerable progress in the development of a means-tested social support system. Social payments made in this context are deemed also to cover WSS expenses. It will not be extended by special provisions for WSS-related social support, because it is deemed to be all inclusive. This system will not cover specific transitional WSS social measures.

Finally, implementation of the Protocol on Water Health has progressed. Parties to the Protocol are required to establish national and local targets for the quality of drinking water and the quality of discharges, as well as for the performance of water supply and wastewater treatment. Moldova has established national targets under the Protocol and adopted the National Programme on implementing the targets. As the Protocol also covers social aspects, it will therefore also lead to changes in the ERS.

In May 2017, Moldova started adopting changes in design and construction standards as laid out in the Building Code. The original standards, known as SNiPs, were from the Soviet era resulting in over-dimensioning and higher investment and operating costs, making many WSS projects unaffordable. The new standards resolve over-dimensioning and permit implementation of international best practice with respect to urban and particularly rural water supply.

Main actors in the ERS, competences, activity and capacity

In the context of Moldova, the key actors and constituents of the ERS, apart from ANRE, include:

• Ministry of Environment and the Water Agency (Apele Moldovei)

• Ministry of Regional Development and Construction (MoRDC)

• Ministry of Labour, Social Protection and Family (MoLS)

• Ministry of Finance (MoF)

• Local public administrations, WSS operators and associations thereof.

The project team interviewed most ERS stakeholders during the second quarter of 2016, and handed out questionnaires. Based on these interviews, and on prior research, the team identified the main ERS actors and their respective roles as of 1 May 2017. These actors and their roles are described below.

National Agency for Energy Regulation (ANRE)

As of September 2014, ANRE has been designated as the competent economic regulator of WSS in Moldova. In interviews to discuss the ERS framework, ANRE took a formal, almost legalistic position. Leading scholars on economic regulation such as Berg et al. (2013) and Rouse (2007) have called for the regulator to take a more dialogue-oriented approach to develop and fine-tune the ERS.

ANRE has been reported to work with utilities in an unrealistic manner, without consideration for their actual capacities and situation. To a large extent, ANRE’s self-adopted tariff methodology leaves the organisation no other choice. ANRE indicated it feels constrained by the Water and Sanitation Law 303 that left it no room for an alternative methodology.

The review and approval process could be better co‑ordinated so that everyone is clear on roles and responsibilities. Some utilities will, in practice, be unable to fully comply with the demand for information from the regulator and may have the impression that ANRE may forever demand new or more in-depth information. The tariff methodology does not hold the regulatory agency to account in providing good governance in this respect.

The mandate of the independent economic regulator is itself a product of water sector reform. Law # 303, which arranges for this mandate, was under review when this report was finalised. Until the amendments have been published, the regulator appears not to consider the actual performance and improvement potential of the utilities. It appears to have no view on the dynamics of water sector reform.. ANRE comes across as isolated from the policy debate (dialogue), whereas best practice suggests the regulator should be a major participant in that ongoing discussion.

Moreover, some stakeholders have indicated the independent economic regulator is, in fact, not entirely independent from political interference. This perception is already a threat to ANRE; its independence goes to the very heart of its existence. Such allegations about regulators are common in other countries, too. However, it is difficult to judge whether there is such political interference. Possible explanations include:

• The tariff methodology is applied too rigidly.

• The tariff methodology has been formulated too rigidly.

• Law 303 needs adjustment before any of the problems observed can be addressed.

A positive development is ANRE’s recent association with its Romanian counterpart ANSRC. However, it would have been better to have arranged for such an association or for Technical Assistance before drafting the tariff methodology (see Kazakhstan example).

Ministry of Environment (MoE)

MoE oversees policy, planning and monitoring of various aspects of the environment, including WSS. It retains responsibility for compliance with WSS-related aspects of the Association Agreement. This is a challenge, given its limited number of staff capable of implementing complex policy reforms. It is also hard to keep water policies on the agenda; the National Development Strategy, for example, gives water only limited attention.

Underneath the ministry, the water agency Apele Moldovei is responsible for water infrastructure, environmental inspectorates and the National Ecological Fund (NEF). Despite the name, the NEF is really an environmental fund and not constrained to just the narrower environmental subject of ecology. For example, the NEF has dedicated income from taxes on packaging material. It invests in irrigation, sanitation and other environmental projects. Figure 2.1 presents data on revenues of, and allocations from, the fund, while Figure 2.2 presents data on allocations for WSS.

The International Monetary Fund (IMF) has criticised the NEF for lack of coherence and transparency in decision making. Recently, the NEF has become administered based on the general rules of the central budget (Law 181 on Public Finance and Budgetary-Fiscal Accountability of 25 July 2014 published in Official Monitor nr.223-230/519 of 08 August 2014). This should improve enforcement of management and procurement rules.

Figure 2.1. The National Ecological Fund of Moldova: Revenues and Allocations

Source: Data on NEF performance in 2010-2015 was collected through interviews with officials of the MoE.

Figure 2.2. National Ecological Fund Spending on WSS

Source: Data on NEF performance in 2010-2015 was collected through interviews with officials of the MoE.

Figure 2.1 and Figure 2.2 indicate that NEF allocations have been mostly for WSS projects.

Two design institutes operate under the water agency “Apele Moldovei”. In addition, a dozen bulk water supply providers are responsible for irrigation and operation of a regional drinking water supply pipeline. Therefore, both the government of Moldova and the EU expect Apele Moldovei to play an important role in integrated water resource management (IWRM).

Ministry of Regional Development and Construction (MoRDC)

MoRDC provides policy, planning and monitoring on various aspects of regional development. It is therefore involved in the regionalisation process of service provision. Furthermore, it backs up operations of the National Fund for Regional Development (NFRD). The NFRD also invests in the water sector, namely in regional projects. NFRD investments in WSS (see Figure 2.3 and Figure 2.4) are smaller than ones the NEF makes. There was found to be limited or no co‑ordination of investment policy between the NEF and NFRD.

Figure 2.3. Total capital expenditure under MoRDC, in million MDL

Source: World Bank BOOST database: http://boost.worldbank.org/country/moldova (accessed in June 2017).

The local public services modernisation project also spends on WSS, among a handful of other public services.

Figure 2.4. Capital Expenditure under MoRDC, in million EUR

Note: Converted at year end MDL/EUR exchange rate.

Source: World Bank BOOST database: http://boost.worldbank.org/country/moldova (accessed in June 2017).

Through its sub-agencies and inspectorates, MoRDC is also responsible for construction standards for WSS: they are quite outdated and cause unnecessarily higher investment and operational costs for WSS infrastructure (see Box 2.1).

Ministry of Labour, Social Protection and Family (MoLSPF)

The Ministry of Labour, Social Protection and Family (MoLSPF) mission aims eventually to ensure a decent standard of living for the population, social peace and security. It acts in the field of social insurance, providing social assistance for the elderly and people with special needs, as well as social protection of family and children’s rights. As such, it has a natural interest in securing access to, and affordability of, WSS. The ministry seeks to fulfil this mission through general income support rather than through specific WSS-related assistance. (OECD EAP Task Force, 2003[1]) actually calls for such specific assistance when tariffs increase sharply. The ministry is not against WSS-related social measures per se, provided they are financed from other sources such as local budgets. It points out that tariffs differ from locality to locality. Decisions on specific social assistance in the field of WSS must therefore be made at the local level. The ministry has indicated it would not free up resources for specific WSS-related social measures. Nevertheless, MoLSPF can be a vital resource for designing targeted social measures in WSS. It is an important partner in decision making on WSS-related social measures.

Box 2.1. Outdated design and construction standards for WSS

In Moldova, design and construction of WSS infrastructure is based on SNiP and GOST standards elaborated during the Soviet era and uniformly applied in the entire Soviet Union. They were last reviewed about 30 years ago.

The following design standards are considered the main guidance documents in WSS:

• SNiP 2.04.02-84: Water Supply. External (outdoor) networks and facilities

• SNiP 2.04.01-85: Internal (indoor) water supply and sanitation systems

• SNiP 2.04.03-85: Wastewater. External (outdoor) networks and facilities

WSS design and construction standards are inadequate and cause unnecessarily higher investment and operational costs for WSS infrastructure. The implications of continued application of outdated SNiP and GOST standards are noted below:

1. Continued reliance on water consumption norms envisaged in SNiP leads to engineering, approval and implementation of oversized supply and sanitation infrastructure. SNiP norms define total water demand of up to 600 lcd for urban areas and 150 lcd for rural areas. However, current average consumption in Moldova is only 111 lcd in urban areas. Additionally, the norms require a high level of supply contingency (e.g. duplication of main pipelines and high storage capacity, high requirements for available flow for firefighting). These instructions result in oversized, often poorly performing and overly expensive systems in terms of both capital and operating costs.

2. Internationally accepted best practices and state-of-the-art technologies cannot be implemented in Moldova as permitting institutions refer solely to requirements of SNiP and GOST standards.

3. There are no adequate standards for small-scale rural WSS systems. Existing codes give common provisions for both urban and rural areas. Adherence to these codes results in massive over-sizing of small-scale systems due to high flow and storage demands for firefighting. Moreover, these outdated norms do not cover modern treatment technologies, creating an obstacle for their country-wide implementation (e.g. constructed wetlands, Ecosan toilets, etc.).

Note: Two years after the cited publication, the standards remained to be updated. New design and construction standards for small-scale potable water supply systems were adopted only in April 2018, leaving other standards still unchanged. For comparison, Ukraine has made progress in deregulation, updating and simplifying norms and standards.

Source: (Pienaru, 2014[2]).

Ministry of Finance (MoF)

MoF is responsible for allocation of national budgets and their administration. In the case of WSS, expenditure is spread over several ministries and agencies, requiring co‑ordination. MoF, however, sees its role as strictly administrative. Furthermore, in the interest of overall budget balance, it seeks to limit any expenditure.

MoF sees only a limited role for itself in streamlining expenditure or supporting WSS cost recovery from tariffs. It is against any further centralisation of finance, for instance for the purpose of social measures in WSS.

Local Public Authority Level I (LPA I, i.e. lowest – settlement, municipal – level)

The provision of WSS is a responsibility of the lowest level of government (LPA I), which owns most WSS infrastructure. LPA I is the competent authority to approve tariffs based on the methodology of ANRE. It is also responsible for the provision of WSS services in its territory. LPAs I are united in the Congress of Municipalities (CALM). On behalf of its members, CALM speaks out for regionalisation of service, but on the basis of autonomous decisions of LPAs. In other words, it promotes voluntary regionalisation of WSS services and operators.

LPAs have to balance the interest of consumers (quality service at low tariffs) with those of long-term sustainable water provision (protecting resources, investment and cost recovery). As owners of the infrastructure, LPAs play a third role – review of proposed new tariffs. Establishment of the independent regulator has reduced room to manoeuvre in the area of tariff setting. LPAs remain the competent authority, but registered operators submit the tariff application to LPA I in accordance with methodology established by ANRE. Furthermore, if LPAs approve tariffs that deviate from the tariff calculation based on the methodology, they have to compensate the operator for the difference. If the LPA rejects approval of the tariff endorsed by ANRE, the operator can get the tariff approved by ANRE. Finally, LPAs can voluntarily delegate the entire competences for tariff approval to ANRE.

Moldova has around 1 000 centralised water supply systems. Just over 40 operators (apacanals) – the incorporated urban operators – have registered with ANRE. According to the World Bank, the latter supplies approximately 58% of the population. The remaining operators continue to work outside of ANRE’s control. During regionalisation, the role of LPAs in the management of utilities will reduce. For rural water supply now, however, LPA is often regulator, owner and operator of the infrastructure.

Local Public Authority Level II (LPA II, rayon level)

Rayons (LPA II) co‑ordinate development of the WSS sector. In the case of Gagauzia, the rayon owns the WSS infrastructure in selected localities.

Consumer organisations, NGOs, WUCs

A number of organisations advocate better policies and performance in the water sector, including the following:

• associations of water consumers that operate small water systems

• water users committees (WUCs), such as the one being created in Chisinau

• pro-poor water and environmental advocacy groups.

Their leverage over authorities is limited. They are sometimes positioned against any tariff increases, private sector participation and regionalisation. Experience in Western Europe and North America shows, however, that these groups may develop as a powerful instrument for performance and governance improvement. They can contribute to water governance in the policy development phase and act as a watchdog thereafter.

Policy co‑ordination bodies

Platforms, task forces or working groups – which can be a permanent instrument for co‑operation, co‑ordination and accountability between water authorities – are important for the Moldovan water sector. The NPD is considered to be such a platform, but it does not meet that regularly, only 1-2 times per annum. The inter-ministerial group for implementation of the WSS strategy gathers only annually. A WSS Commission could convene as often as required but it was formally dismantled in August 2015.

In a report to the NPD, this project noted that the WSS Commission, based on GoM decree #92 dated 23 December 2009, needed revitalisation.

IFIs, donor community and other international organisations

International financial institutions (IFIs) and organisations such as the EU can be perceived as part of a broadly defined set of ERS actors. They have influence because they co-fund capital expenditure and other development in the sector. Although they do not exercise this influence officially, they may do so nonetheless. In Moldova, their role in (shaping) the ERS has so far been limited.

WSS operators

So-called Apa Canals (municipal water utilities) manage and operate local or regional WSS facilities. Although they are subject to the ERS, they are responsible for their own development. Case studies from around the world show that strong, visionary and autonomous managing directors of water operators have sparked reform in some countries (Geert Engelsman, 2016[3]).

WSS operators can be organised legally in several different ways and have different legal status: from NGO to corporation. These include water users’ associations and co‑operatives, municipal enterprises, limited liability or joint stock companies in public or even private property. There are just over 40 incorporated operators in cities. WSS operators are united in the Association of Moldovan Water and Wastewater Service Providers called AMAC.

Tariff methodology and its application

The tariff methodology is a key part of economic regulation and therefore of the ERS. In simple terms, independent economic regulation of WSS in Moldova aims to ensure that customers receive the right water for the right price. More urgently, the process of regulation aims to help utilities pursue sustainable development. Without sustainability, the increase in coverage eventually reverses into decline. Customers without WSS services have no interest in being protected from too high tariffs. The concept of the right price shall therefore embrace the notion of sustainable development and transition paths towards efficiency targets.

The tariff methodology developed by ANRE is based on its mandate under Law 303 on Water Supply and Sanitation. ANRE is a multi-sector regulator, responsible also for gas, electricity, district heating, technological and bulk water. The vast majority of the countries surveyed by OECD also have a multi-sector regulator i.e. 23 out of 34 (OECD, 2015[4]). That should not mean, however, that WSS is to be regulated in the same manner as other utility sectors.

The main remarks on the methodology and its application are presented below. At the time of writing, amendments to the Law 303 on WSS were proposed that would require significant adjustments to the tariff methodology. These proposed amendments could not be fully reviewed before submission of this report.

Regulation should consider specificity of transition country

WSS in Moldova is not a mature industry. However, the tariff regulation lacks any consideration for the performance improvement process that utilities have begun or should begin, and the time needed to accomplish it. The methodology assumes that efficiency can be achieved literally overnight. In practice, however, harmonisation of tariffs for legal entities and households can be achieved more easily over time. The optimisation of staff levels and reducing NRW to an acceptable level takes at least three years to achieve. This minimum period reflects the typical length of business plans, tariff transition periods and management contracts that rarely are made for shorter periods. The regulation is not adequate for the situation of operators. It is based on utility management as a mechanical clockwork type operation with minimal variation; in fact, the opposite is true. Therefore, as in Albania and Kosovo, the key document for the regulator is/should be the operator’s business plan, supplemented by its investment plan. The business plan shall show and justify the performance improvement that can realistically be achieved. The remaining costs are then a necessary and partially transitional cost to be financed by any of the 3Ts (tariffs, taxes or transfers). One cannot expect a utility to perform much better than its approved business plan assumes.

Cash flow constraint

Even if a more gradual performance improvement schedule could be built into the eligible costs calculation, a major problem remains with the methodology (see Box 2.2 for definitions of various terms). Depreciation of non-donated assets over their lifetime is an eligible cost. However, if assets have been financed under a loan, the payback period is typically much shorter than the life of the assets. This leads to a liquidity problem for the utilities. Furthermore, the loan covenant typically requires Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) to go well beyond the debt service. Such covenants cannot be met as the return on capital allowed on assets does not provide enough revenue.

Box 2.2. Definitions in economic regulations of WSS

Affordability: Affordability is the capacity of a particular household group to cover all WSS-related expenses (including VAT, taxes and any additional charges). It is often expressed as a percentage of household income or expenditure. In Moldova, where both the informal economy and foreign remittances are substantial, affordability is best estimated based on household expenditure. Affordability is widely considered at stake if 5% of the average (median) household expenditure is used to pay WSS bills i.e. over 50% of the population spends more than 5% on WSS. Often, the word affordability is used for the actual percentage spent on WSS.

Eligible costs: Those parts of overall costs incurred by an operator that the regulator deems needed to provide the regulated service.

RAB: The Regulatory Asset Base is set by those assets of the operator deemed necessary for providing the regulated service. A higher amount of RAB assets provides for a higher eligible depreciation expense, higher regulated return on assets and thus higher eligible costs.

RIA: The (ex ante) Regulatory Impact Assessment is a systematic process of identification and quantification of important benefits and costs likely to flow from the adoption of a proposed regulation under consideration.

WACC: The Weighted Average Cost of Capital is a calculation of the operator’s cost of capital in which each category of capital is proportionately weighted. All long-term capital associated with the regulated service is included. WACC rises with the so-called Beta factor, measuring the risk of equity capital. Estimating Beta in illiquid companies is more difficult than for those listed on the stock exchange. A higher regulated WACC implies a higher cost of capital (of the RAB) and therefore a higher tariff.

Source: (OECD, 2015[4]).

Social aspects

Tariffs need adjustment if the affordability of service for the population is at stake. OECD EAP Task Force (2003) recommends limiting the average total water bill to 4% of average household expenditure. In Moldova, as water is valued high and the willingness-to-pay for quality water is high, the limit could be established at 4-5%. However, Figure 2.5 shows that adhering to this rule would not help increase user charge revenues: most households already pay over and above that limit for WSS. Although the chart overall is informative, the underlying sources of data are not available. Therefore, it is not clear how the country figure can be above both the urban and the rural average in the first two deciles (Eptisa, 2012[5]).

Figure 2.5. Affordability assessment for Moldova's urban, rural and entire population

Source: (Eptisa, 2012[5]), Republic of Moldova’s Water Supply and Sanitation Strategy (Revised Version 2012), www.serviciilocale.md/public/files/2nd_Draft_WSS_Strategy_October_final_Eng.pdf.

Apart from a general affordability ceiling, social measures targeted at the poor and vulnerable are needed. Unlike other economic regulators, most notably for Flanders, ANRE does not provide any direction for the social dimension of WSS. This is because Law 303 does not permit it. The national WSS strategy states, however, that “the regulator should be responsible to ensure a reasonable balance between the need for renovation and quality of services and affordability constraints of certain tranches of population”.

The word social or affordable does not occur in the tariff methodology. For ANRE, social measures are a matter of social policy at the national or local level. The report on domestic financial support mechanisms in WSS in Moldova argues that solidarity measures are required within the sector, at least temporarily, when tariffs are rising drastically (OECD, 2017[6]). Such measures may be related to supply, demand, income or tariff. When policy makers opt for tariff-related measures, ANRE needs to set affordability ceilings and rule on tariff structures or other measures such as vouchers and rebates.

Non-tariff related measures could be implemented by other parts of the ERS. These might include measures to improve water supply and access for the poor, and to offer income support.

Moldova is by far the poorest country in Europe (see Figure 2.6). The 2015 Human Development Index shows the country in 107th place. Different studies have signalled the need for a genuine affordability constraint at 4% of household expenditure and for the regulator to act in this respect (Pienaru, 2014[2]; OECD, 2016[7]).

Figure 2.6. GDP per capita in Moldova and selected CEE countries

Source: World Bank, World Development Indicators (database), www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gnp_pcap_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:HUN:SRB:RUS:MDA:ROU:GEO:ARM&ifdim=region&tstart=1329001200000&tend=1455231600000&ind=false (accessed in August 2017)

Tariffs considering the costs associated with indoor water supply in apartment blocks

Articles 16 and 59 of the tariff methodology make a peculiar stipulation. If an apartment owner in a condominium has an individual contract for WSS, the tariff may consider the costs associated with indoor water supply in that condominium, such as for maintenance and repair of networks and meters. This implies a differentiated tariff between:

• apartment owners without individual contracts and house owners not living in condominium-type apartments

• apartment owners with individual contracts in condominiums.

The methodology implies that WSS operators will carry out an extra service for which they are compensated to the tariff. This is not a desirable solution to problems with condominiums:

• Costs of this service are hard to quantify.

• Maintenance is hard to distinguish from investment.

• Costs are unevenly distributed among the condominiums.

Under this provision, apartment owners have no incentive to solve internal losses either before or after individual contracting. Operators will effectively delay individual contracts. Responsibility for the operator shall be up to the point where it exits the public network and enters the private network.

Ownership and depreciation

The tariff methodology excludes granted assets from the base over which the return on assets and eligible depreciation expenses may be calculated (see Box 2.3). This is a common rule, applied for instance in England and Wales, to avoid excessive profit (grant income plus tariff income based on eligible costs).

For some utilities of lower-middle-income countries, however, newly donated assets may be depreciated well over 75% of the net book value. The remaining assets may be sizeable, but mostly have been written off already.

Imagine two identical utilities, A and B, carrying out an identical investment project. For their capital expenditure, A has received a loan, whereas B has received a grant. B would have to charge a tariff well below cost recovery level, whereas A may charge at this level. After ten years, utility B is back at its starting position. Unless a new donor steps in, B will fall behind and into the same vicious circle it tried to escape. Conversely, A will have paid back its loan and can show a steady cash flow to future financiers.

There is a risk that B’s lower tariff is perceived as reflecting better performance. This could lead to the expectation that B’s tariffs shall remain artificially low and that A’s tariffs should come down.

Indeed, if B had been able to charge the full depreciation expense to customers it would eventually generate free cash flow. B’s investment plan would have to show use of the free cash flow. Given the state of the water infrastructure, this free cash flow could easily be invested to good purpose. Tariffs need to be determined by affordability levels and costs, but not by funding method.

One solution to this dilemma may be to allow for infrastructure renewal charges, such as in England and Wales, Scotland and Kosovo. The actual costs to maintain the asset base rather than the depreciation charge should be an eligible expense. Another solution is ring-fencing the depreciation expense, which will be discussed in section 4.7.

Another question revolves around questions of ownership. In principle, since LPAs in Moldova largely own operators, there is no difference if one LPA transfers infrastructure to a regional operator whereas another public-owned operator brings in its own assets into the regional operator. In practice, however, questions of ownership form a big obstacle towards regional co‑operation. LPAs fear being blamed for tariff increases. As a consequence, new investments and the introduction of more cost-recovering tariffs are delayed and the value of the asset base deteriorates further.

Box 2.3. “BOT” in Moldova

Customers in Moldova and a number of other SEE countries commonly invest their own funds to develop a network. The utility then effectively operates and maintains the network in perpetuity. The practice is an answer to the scarcity of public investment funds. Rather than waiting for another 10 or 15 years, communities prefer investing their own money. The effective status of an asset determines whether it needs to be capitalised and depreciated. If it is capitalised, the question arises how the counter-value is booked. In principle, both the so-called equity and income methods are allowed under the International Financial Reporting Standards. Under the equity method, the equity of the operator is increased at once against the value of the assets. The income method recognises the increase in assets against a “deferred grant income”. This grant income is subsequently recorded in the profit and loss statement in the same amount as the annual depreciation of the assets. The income method increases the income of the operator every year in the amount of the annual extra depreciation charge associated with the granted assets.

For grants to fund new investment, the income method is most appropriate. Although this may have fiscal consequences, donors can rule them out in a grant agreement. In this way, for fiscal purposes, the grant income would be ignored. In the context of regionalisation, the equity method is more appropriate and may be applied. More likely, however, is the transfer of assets for a definite or indefinite term only, for instance for 30 years. For the operator, this may still impose the obligation to capitalise these assets anyway.

The Constitutional Court of Moldova declared on 1 November 2016 that a transfer free of charge cannot be imposed on an owner of assets. This applies to natural and legal persons that transfer assets to a WSS operator without compensation. Typically, these are networks built or owned by municipalities, or built by small communities of users or associations of private persons. Law 303 on Water and Sanitation Services stipulates that a transfer of such assets shall be free of charge. The Constitutional Court has ruled that this amounts to expropriation. It is not fully clear yet if a voluntary transfer of assets is allowed. However, it is clear it shall not be necessarily for free. Furthermore, it will be difficult to assess the voluntary nature of such a transfer because WSS operators are natural monopolists.

Further jurisprudence will reveal what kind of compensation may be classified as sufficient charge. One can be certain, however, that operators lack funds to compensate for the investment value of the networks that has been transferred. It’s conceivable to consider the counter-value of the transferred assets as a connection fee. This would, however, not be permittable legally as it would imply discriminatory pricing.

Any chance of compensation to owners of assets would slow down the regionalisation process by creating uncertainty over the terms and legality of the transfer.

Source: Author’s own elaboration.

Tariff structure and cross subsidies

The regulation assumes a single volumetric tariff that is the same for households and legal entities alike. Generally, this is positive and in agreement with the polluter pays and beneficiary pays principles. However, as the tariffs for household and legal entities sometimes have a large differential, a transition period is needed to phase out the cross subsidy.

The application of a single volumetric tariff follows the practice in all but two utilities in Moldova and in most Eastern Europe, Caucasus and Central Asia countries. Distributional effects of Increasing Block Tariffs (IBTs) are questionable (OECD, 2017[6]). As a minimum, they require social research into setting the right brackets and relative tariffs. They make revenue planning complicated and expose the utility to disproportional reduction in revenue if demand goes down. Therefore, it is better to focus on other measures than IBTs.

A two-part tariff structure as applied in Germany and the Netherlands is also not advised. It would have a sizeable fixed component plus a single volumetric component. In the absence of further social measures, this approach will have regressive effects compared to the single volumetric tariff. The two-part tariff structure does bring the revenue structure more in line with the cost structure of utilities, which have large fixed costs. Some regulators allow limited fixed elements in the tariff structure, namely those related to customer services such as metering, billing and meter maintenance.

Preparation and application of the methodology

Tariff regulation in Moldova has taken a long time to be completed and still has significant gaps. For example, the regulation does not provide necessary guidance on capitalisation of material costs or the calculation of eligible interest on working capital. Regulation takes time to develop, but this should not stop issuance of provisional or temporary consent for tariff increases. In most utilities, tariffs have stayed frozen for the past two years.

In public hearings preceding the adoption of the methodology, only Apa Canal Chisinau made substantial comments.

ANRE did not pursue possible short-term solutions. Provided they had been worked out consistently, the eligible costs, RAB and WACC concepts underlying the ANRE tariff methodology could have led to an indicative starting point for tariff setting. A softer application of the methodology could still have allowed for an affordability and cash flow check. Using its discretion as an independent economic regulator, ANRE could still have implemented necessary transition paths, allowing for performance to improve, affordability to go up and loans to be repaid.

Regulation may not be enforceable from the first day because utilities need time to comply and regulators need time to work out and test the details. A regulator judges this context and maps out a viable tariff and corporate transition path as part of its role. In the context of a transition country, this regulation necessitates capacity building. Technical Assistance programmes to regulatory agencies in SEE show that training of staff is important. It allows independent regulators to train operators so they can comply to the regulation.

That approach to regulation, however, requires an appropriate sector structure. The WSS sector in Moldova has already over 40 incorporated entities. Without doubt, for ANRE this is too large a number to regulate effectively. The remaining, unincorporated water works did not file for a licence and ANRE is not pursuing them to do so.

A handful of operators is needed to regulate the present and future capacity appropriately. This requires ANRE to support the regionalisation strategy in the interest of proper regulation. Indeed, the national Water Supply and Sanitation Strategy recommends such support to the regulator.

To optimise use of resources, the economic regulator may focus on bigger and regionalised utilities and allow the others to work under a heavily simplified regime. If, as in Romania, only regionalised operators are eligible for funding capital expenditure projects from public funds, then regionalisation will proceed much more quickly.

Funding gap

Section 1.4 indicated that ERS should facilitate external finance to bridge the funding gap. How big is this funding gap?

Tariffs, taxes and transfers

The ultimate sources of funding for WSS operating and capital expenditure comprises only the “3Ts”: tariffs (user charges), taxes (government subsidies) and transfers (donor assistance). As shown in figure 1.4, debt and equity can temporarily bridge any funding gap. However, they need to be repaid from any of the 3Ts (OECD, 2010[8]).What are the sources of funding in Moldova?

1. User charge revenues (tariffs)

User charge revenues, or tariffs, represent an annual revenue stream of about EUR 51 M for incorporated, urban utilities in Moldova (Figure 2.7). Annex 2.A presents data on tariff rates applied by water utilities in 2015.

2. Government subsidies (funded from collected taxes)

Government capital expenditure subsidies amount to approximately EUR 18 M per annum, mainly through the National Fund for Regional Development and the National Ecological Fund.1

Government operating subsidies of approximately EUR 6 M are also part of the “taxes” component. Excluded here is donor assistance that is merely channelled through the government budget.2

3. Donor assistance (transfers)

Donor assistance is partly carried out through the government budget and partly transferred directly from development organisations. In both cases, the source of funding is “transfers”. The Water Supply and Sanitation Strategy counts on about EUR 20 M per year.

In summary, annual sources of funding from the 3Ts are:

 

Tariffs:		EUR 51 M
Taxes:	Operating subsidies:	EUR 6 M
	Capital expenditure subsidies:	EUR 18 M
Transfers:		EUR 20 M
Sum of 3Ts		EUR 95 M

Indicative operating and capital expenditure

Revenues from the more than 40 incorporated Moldovan utilities from billing and operating subsidies (EUR 57 M altogether) do cover operating expenditure. There may be inefficiencies such as large overhead and staff costs, but maintenance expenditure is likely underspent. Operating subsidies can be phased out. On balance, EUR 51 M per year can be sufficient to cover operations.

The remaining costs are:

• required capital expenditure to comply with the EU acquis

• repercussion of capital expenditure on operating expenditure

• recurrent capital expenditure.

What are the remaining costs? In 2008, OECD estimated compliance costs of EU directives to be at least EUR 1 850 M. That figure is almost the size of the annual budget of the government of Moldova. Using the annual non-EU average of the Danube programme required investment per capita as reference (EUR 15 per capita per year) for 20 years, the figure would be around EUR 1 050 M (3.5 M people * EUR 15 per capita per annum * 20 years).

After correcting for population differences, this figure is consistent with a more detailed study of compliance costs for the Former Yugoslav Republic of Macedonia (FYROM), a relatively comparable country in terms of income per capita and geography.

The OECD estimate from 2008 may therefore have been at the high end. However, the WSS strategy calculates costs at just EUR 705 M, out of which EUR 194 M is to be spent before 2019. This implies an annual expense of (only) EUR 39 M. However, at least EUR 20 M in recurrent capital expenditure/increased operating costs should be added annually.

The annual total expenditure until 2019 would thus be:

 

Operating expenditure:	EUR 51 M
Capital expenditure	EUR 59 M (including increased operating costs)
Total expenditure:	EUR 110 M

After 2019, this figure would still increase by EUR 6 M annually because of more capital expenditure foreseen under the WSS strategy and requirements to comply with the EU water acquis.

Closing or bridging the gap

The annual difference between the sum available through the 3Ts (EUR 95 M) and the planned use of funds (EUR 116 M) is EUR 21 M. This is illustrated by the difference in size between the first and third column from the left in Figure 2.7. Because of the gap, actual capital expenditure is much smaller than foreseen in the WSS strategy. Is it possible to close the gap through a different funding structure?

Figure 2.7. Assessing the funding gap in WSS in Moldova

Source: Author's own elaboration

The second column from the left in Figure 2.7 elaborates how a different funding structure could close the gap between sources of funding and planned use of funding. External assistance from donors is unlikely to surpass the amount assumed in the WSS strategy. This is due mainly to capacity constraints on the recipient side. It is assumed the central government will spend 1.2% of its total budget on WSS capital expenditure in accordance with the WSS strategy. The GDP of Moldova is around EUR 7 000 M. The consolidated national public budget is around EUR 2 000 M, of which 1.2% amounts to EUR 24 M or 33% above the current level. It is assumed the required increase in capital expenditure will be financed entirely by abolishing operating subsidies. The remaining source of funding is tariffs. Relying on tariff increases alone implies increasing their contribution by 41% (from EUR 51 M to EUR 72 M). An increase in service areas, however, will also increase revenues of the utilities. The associated increase in costs of service area expansion has already been considered in the repercussions of operating costs on investment. Given the lower-income levels in rural areas, one must be cautious with factoring in extra revenues from service expansion; a required tariff increase should still be in the order of 30%.

Since capital expenditure comes in peaks for individual utilities, loans are needed to bridge the funding gap. They can be obtained (only) if a sufficiently large, credible and projectable flow of 3Ts, i.e. the ultimate sources of finance, can be shown to investors. Given its poor credit rating, Moldova will struggle to obtain external, market-based finance to bridge the gap. Fraudulent behaviour in the banking sector of Moldova and a sizeable amount of non-performing loans do not help. Due to delays in the tariff application and approval, the disbursement to Apa Canal Chisinau under the first tranche of the loan from the European Bank for Reconstruction and Development and European Investment Bank has yet to take place. This signals risk to lenders with respect to regulation and absorption capacity. Moldova cannot rely on repayable external finance to bridge the gap until it takes steps to restructure the 3Ts in order to close the gap.

In the case of Moldova, increased tariffs must provide the bulk of the increase in the sum of the 3Ts. Two challenges arise here:

1. Section 2.3 already mentioned that the tariff methodology fails to consider the cash flow implications of loan financing. Utilities that can obtain external finance would be unable to apply tariffs to meet debt service obligations and loan covenant ratios. Without this adjustment in tariff-setting methodology, external finance to the sector (donations and lending) will dry up.

2. Considering the affordability constraints signalled in the WSS strategy, social measures to mitigate the impact of tariff increases on the poor must be developed without delay. Eventually, the costs of living index and social transfers will reflect increased household expenditure for WSS . Short-term social measures, however, must be developed within, and carried out through, the WSS sector itself.

These two challenges mean that Moldova needs to put social measures and affordability criteria firmly in place before considering such an increase in tariffs (OECD, 2017[6])

The funding gap is not systematically monitored, let alone addressed. The MoF could, for instance, develop a multi-year perspective on phasing out operating subsidies in favour of capital expenditure subsidies.

For the MoE, the funding gap implies a gap in its entire WSS sector strategy. Before strategies can be developed to close or bridge the gap, the ERS shall first monitor it. The above calculations are only a rough approximation.

ERS evaluation

Moldova’s internally and externally agreed policy objectives put strong but legitimate demands on its ERS for WSS. The confrontation of these demands with the reality of the ERS is striking.

1. Performance monitoring and incentives for improvement are lacking. The tariff regulation requires an initial monitoring of the base costs, after which, except for electricity, all tariff adjustment is fixed by parameters independent to performance. Incentives are therefore either meaningless or grossly unfair. Among other things, the ERS does not provide incentives for optimising the capacity of WSS systems where they are highly oversized. Water utility performance is not monitored and evaluated against benchmarks with results publicly released.

2. Regionalisation is not moving ahead in the absence of leadership to push through required changes in the legal framework, as well as lack of preparedness of some LPA I and lack of legal enforcement of their agreements.

3. Regulation is designed based on norms that consider only one business model: an efficient, single purpose, non-regionalised water utility (Apacanal) owned by municipality. The ERS does not look for or create incentives for optimised, sustainable business models in terms of vertical integration, outsourcing or regionalisation. Adopting such incentives would scare away private sector participation and outsourcing services.

4. Tariffs may not even cover operation, let alone funding of expanded services such as WWT or a rate stabilisation fund (the United States applies such a fund, for example) to avoid drastic tariff increases.

5. The ERS provides no mechanisms for protection of poor and vulnerable citizens. It is left to local government or the Ministry of Social Affairs to step in if they see any need.

6. There is no established affordability threshold for the population at large below which tariffs may gradually rise.

7. There is no monitoring of a funding gap that may erode execution of the WSS strategy. If the funding gap could be bridged, there is no allowance in the tariff methodology to meet debt service coverage ratios or other loan covenant requirements.

8. Outdated design and construction standards prevent achieving the WSS-related SDGs in an economic, cost-effective manner.

9. There are no plans to expand economic instruments for environmental policy, for instance, to wastewater collection and treatment, including construction of WWTPs.

Independent economic regulation will help address some shortcomings, but building a sound ERS is the responsibility of the government at large. The government shall also provide for quality in the governance of the regulator itself. Frequent dismissals and (re‑)appointment that leave a suggestion of political interference will only harm the regulators’ credibility.

Figure 2.8 illustrates good regulation as fitting pieces of a puzzle:

Figure 2.8. Necessary elements of better regulatory outcomes

Source: (OECD, 2015[4]), The Governance f Water Regulators.

In the case of Moldova, none of the pieces is particularly well developed or fits with other elements. The ERS appears fragmented. Individual components of the system are in place, but the overall result cannot be classified as a system. Individual ministries and agencies operate in isolation within strictly defined “territories” – a clear case of the silo approach. No single actor co‑ordinates or provides oversight. The body that could play this role, namely the WSS Commission, was abolished in mid-2015.

The economic regulator for WSS appears to draw on legal competences more than on authority and sector experience. No TA programme or strong connection to international water regulatory practice is in place. The regulator itself may not be governed according to best practice (see section 3.1).

Amendments to Law 303 are being discussed at the time of writing. It remains important to evaluate exactly to which extent the amendments will address weaknesses mentioned in this chapter.

The situation does not look bright. However, it remains possible to get the rules, processes, capacities, frameworks and institutions right. Chapter 3 looks at best practice that might be applied in Moldova and is consistent with the Association Agreement.

Scenarios for the ERS of Moldova

The NDP reflected on three options to develop the ERS in Moldova: “de-bottleneck”, “back to the drawing board” and “complete and reorganise”. These options are discussed in detail below. The NDP adopted the third option, but also kept alive the second option.

Option 1: “De-bottleneck”

Overview

This option addresses the shortcomings of the ERS within the current system. This implies leaving all institutions and regulations intact, focusing on co‑operation and informally revising roles of key actors and procedures for interaction. In this way, the focus is on practical, ad-hoc solutions to present problems.

Within this option, any attempt to create WSS-related social measures on the ground must rely on the good will and budget of LPAs. There is no space to address the social dimension of WSS through tariff or supply measures. The tariff structure will remain single volumetric.

Implications

First, there are no obstacles or significant costs, and no legislative changes needed before implementing this option.

Second, as another advantage, it addresses only elements of the ERS perceived as problematic. This may be a disadvantage, too, since it does not identify missed opportunities. The problems identified could be symptoms (e.g. issues related to tariff increases required under loan covenants but not possible under the ERS). Focusing on symptoms will not address underlying structural shortcomings in the ERS.

Third, there is no leadership in the ERS improvement process in Moldova precisely because the framework stays intact. In reality, developing an improved ERS requires years of more structural institutional development as witnessed in Italy, England and Wales, Kosovo and many other countries (Rouse, 2007[9]; Massarutto, 2013[10]). Some case studies provided by an EU-funded collaborative research – the “Economic Policy Instrument” project – provide further examples.

Conclusion

It is unlikely that Option 1 can address demands on the ERS outlined in section 1.4.

Option 2: “Back to the drawing board”

Overview

This option takes a step back to rethink the objectives of WSS policy, regulation and the roles of various stakeholders and eventually redesign the whole ERS. It requires a further in-depth reflection on what Moldova expects from its ERS, in a way similar to what was done in section 1.4 (improved performance; focus on large, regionalised entities; sustainable business models; tariff increases; social protection; affordability constraints; affordable loans and repayable external finance).

Implications

Further reflection is required on the difference between laws and regulations. In good legal practice, laws establish general principles that are subsequently worked out in detail and explained in regulation. In contrast, the Moldovan law is detailed, leaving little room for adjustment, according to circumstances, in the spirit of the law. Lawmakers have effectively become regulators, leaving the official regulators little room to do their job. Such detailed laws provide more scope to be in conflict with one another, which is frequently the case.

This option would allow for a complete ERS revision in accordance with EU and other international best practice. That goes beyond the process in Kazakhstan described in the previous chapter. It would allow for a higher standard in economic regulation, such as through imposing regulatory impact assessment. It could impose a more active role in performance monitoring on the regulator, providing for transparency and truly incentivising performance improvement. Social measures and affordability check may become an integral part of the regulator’s mandate.

The regulator may receive more discretion for its mandate. Whereas some standards shall clearly apply to all, other standards may not have to be enforced for everyone immediately. In this regard, the regulator is best positioned to make an independent judgement, free of interests. This also requires addressing the governance of regulators, building in more independence and protection from politics in combination with more accountability.

Time and capacity are the chief constraints.

Time: Other countries, such as Albania, FYROM, Kosovo and Kazakhstan, allocated two-three years for a comprehensive redesign and re-implementation of the ERS. As a minimum, the ERS shall continue to function and ideally still improve in performance. Usually, during such a period of change, stakeholders take a “wait-and-see” approach. Can Moldova afford to lose time on an uncertain outcome?

Capacity: Delivering such a demanding ERS requires sector and legislative expertise that is in short supply in Moldova. It requires good inter-ministerial and interagency co‑operation. It will be challenging to develop a wholly new ERS, especially given the lack of capacity to manage even the existing model. There is a risk the project will not lead to the desired outcome, especially in the absence of a “champion” i.e. an organisation that takes leadership of the process.

Perceptions: Law 303 on WSS services dates from only 2013. As of May 2017, the independent economic regulator has had its mandate for WSS for less than three years. Taking a U-turn after so short a period may be perceived as inconsistent governance and policy. If, however, one could be sure of achieving the desired policy outcomes, this U‑turn may be only a minor disadvantage.

Conclusion

Moldova’s lack of time and capacity are the main disadvantages with respect to Option 2.

Option 3: “Complete and reorganise”

Overview

The third option seeks progress through dialogue, gradual adjustment and capacity development. It will fill any gaps in the ERS and, if necessary, reorganise. A reinstated WSS Commission would play a key role as a central government body and a platform for permanent stakeholder co‑ordination.

Implications

The approach would seek high-level consensus on Moldova’s ERS expected achievements, considering strategic sector development targets up to 2030, the Association Agreement, the EU directives, the Paris Agreement on Climate and SDGs.

Where necessary and possible, legislative amendments shall be limited to Law 303 on WSS.

ANRE is well placed to develop a more outspoken profile, engaging in public debate, and seeking to clarify and test the boundaries of its mandate through dialogue. This mandate shall be confirmed by legislative amendments if needed. ANRE should indicate limitations in its mandate for which other parts of the ERS shall take responsibility. Obviously, that includes design and construction standards, but also the development of economic instruments to ensure the sustainability of WSS services. ANRE can act as a vocal advocate for change, therewith reassuring current and potential financiers and donors.

The government of Moldova could look into a specific WSS Technical Assistance package for the economic regulator. It could also support developing stronger links with other WSS regulators in EU and transition countries. EU countries have best practice to offer. However, they have little experience with regulating service providers that are cash- constrained, require drastic performance improvement, operate networks of poor quality and need massive capital expenditures to catch up. Many other non-EU countries did obtain such experience over the last two decades.

The tariff methodology would be updated using domestic and foreign expert assistance based on a clear set of policy objectives that is agreed upon before drafting the methodology.

The WSS Commission would be best placed to lead the reform process. It would co‑ordinate regionalisation and facilitate use of sustainable business models, including respective levels of horizontal and vertical integration, outsourcing and private sector participation.

A social measure should provide WSS assistance to mitigate the negative effects of tariff increases on the poor. The measure shall be developed through careful stakeholder consultation. It shall provide for an optimal level of autonomy to LPAs, enabling them to adjust to local needs and degree of solidarity. The financing of the measure shall be transparent.

Conclusion

Implementation of Option 3 can start without delay. One possible difficulty, however, is balancing the competences of the ministries with that of the WSS Commission. Formally, the competences rest with the ministries. The ministries, however, will have to respect and feel committed to results or compromises achieved in the WSS Commission. Kosovo successfully resolved this issue by bringing the chairmanship of the Commission under the Office of the Prime Minister. However, it remains a risk whether the policy outcomes can be achieved and be firm enough for implementation.

Adopting an option

Table 2.1 summarises the advantages, risks and implementation prospects associated with each option.

Table 2.1. Evaluation of options: “Implementability” versus desired policy outcomes

	Option 1	Option 2	Option 3
A. ”Implementability”
Elaboratin and implementation time	++	-	+
Administrative and governance costs (of implementation)	++	=	+
Implementation risk	++	+	= ***
B. Desired policy outcomes	- -	= *	= **

Note: *Risk: after a long process, there will still be no desired policy outcomes. **Risk: achieving the desired policy outcomes depends on stakeholder co‑operation. ***Risk: more fundamental legislative and institutional changes are required to ensure that implementation is not obstructed.

++ Good prospects and/or very limited risk (for implementation)

+ Reasonable prospects and/or limited risk

= Significant obstacles and/or significant risk

-Serious obstacles and/or significant risk

- - Almost blocking obstacles and/or almost blocking risk

Source: Author’s own elaboration.

Options have been discussed with policy makers, experts and various other stakeholders. The two most important discussions were at the Expert Meeting on 16 November 2016 and the NPD Co‑ordination Committee meeting on 17 November 2016. The report on the Expert Meeting can be found in Annex 2.B.

The consensus among experts and other stakeholders tended towards the third option i.e. to “complete and reorganise the ERS”. The MoE, however, has stated a firm preference for Option 2 i.e. the “Back to the drawing board” option.

Individual engagement may matter as much as the option chosen. Ultimately, individuals, not systems, engage and co‑operate (or not). They align interests, build trust, make compromises, invent solutions, deliver, etc. All of these elements are vital in successful ERS development.

The decision to start on Option 3 without delay, but keep Option 2 open, was welcomed by participants at the Expert Meeting and the NPD Co‑ordination Committee meeting as the “best of both worlds.”

Recommendations for comprehensive reforms need to be elaborated. Whether these are eventually implemented under Option 2 or 3 is of secondary importance. The next chapter elaborates recommendations for ERS reform, considering the consensus among stakeholders and experts.

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Annex 2.A. Tariffs in Moldova as of May, MLD/m3

 

№	Name of water supply company (apa canal)	Average tariff	Population	Other	Budget	Other
1	S.A. “Apă-Canal Chisinau”	8.86	8.06	12.7	-	6.69 technical water
2	Î.M. “RCL” Cricova	12.86	10	34.86	-	-
3	Î.M. “RCL” Ciorescu	11.05	7	21	18.02	-
4	Î.M. D.P. “Apă-Canal” Anenii Noi	13.53	13.50 /4.5	37.40	-	7.5 vulnerable households
5	Î.M. “Comunservice” Criuleni	10.7	9.2	30	-	-
6	Î.S. “Apă-Canal” Straseni	14.72	14.60	30	-	-
7	Î.M. “DC” Cojuşna	-	-	-	-	-
8	Î.M.C. “Floreni-Service”	8.88	7	13	-	-
9	I.M. Regia “Apă-Canal" Balti”	15.05	11.08	23.64	-	-
10	Î.M. D.P. “GCL” Făleşti	14.51	10.9	35.20	-	-
11	Î.M. “Servicii Comunale Glodeni”	23.61	13.2	54.83	-	-
12	Î.M. “Gospodăria Comunală Rîşcani”	13.85	12	28	-	25 professional school
13	Î.M. D.P. “Apă-Canal” Sîngerei	10.71	9	40	13	-
14	Î.M. “Apă-Canal” Cahul	11.25	6.0 / 12.0	27.97	21	-
15	Î.M. “Apă-Canal” Cantemir	14.05	9.95	24	-	9.8 public restroom
16	Î.M. “Apă-Canal” Taraclia	13.61	10	37.50	16.67	-
17	Î.M. “Apă-Canal” Edineţ	21.35	12.5	25.05	19.15	-
18	Î.M. “GCL” Briceni	12.82	11	35	-	-
19	Î.M. “Apă-Canal” Donduşeni	17.7	14	33	33	-
20	Î.M. “Apă-Canal” Basarabeasca	9.7	9	36	-	7 single pensioners
21	Î.M. “Apă-Canal” Leova	21.03	16.03	34.82	-	-
22	S.C. “Amen-Ver” S.A. Hînceşti	22.07	18.40	50.40	-	-
23	Î.M. Regia Apă-Canal Orhei	15.7	16.20	26.10	-	2.9 Piatra 16.2 sports complex
24	Î.M. “SCL” Rezina	21.50	12.80	51.8	-	-
25	Î.M. D.P. “Apă-Canal” Teleneşti	12.39	10	35	-	-
26	Î.M. Regia “Apă-Soldăneşti”	6	5.4	12	-	-
27	Î.M. “Apă-Canal” Drochia	17.81	10	39.17	-	-
28	S.A. “Service-Comunale”  Floreşti	21.16	19.36	35.09	32.26	-
29	S.A. “Regia Apă-Canal” Soroca	17.85	10.90 /15.26	35.20	40.94	14.5 population s.Egorovka
30	Î.M. “Apă-Canal” Căuşeni	17.38	14.00	38.00	-	-
31	Î.M. D.P. “Apă-Canal” Ştefan Voda	17.60	15	48.74	-	28 heating work
32	Î.M. “Apă-Canal” Ungheni	8.98	5.84	22.04	13.90	-
33	Î.M. “GAAC” Nisporeni	16.92	14	37.23	18.80 /22.34 school	37.23
34	Î.M. “GCL” Calarasi	18.16	16.5	28	-	-
35	Î.M. “Su-Canal” Comrat	19	16	32.92	35.41	11.67 S.A. "Aidîn"
36	S.A. “Apă-Termo” Ceadîr-Lunga	18.76	16.2	40	-	16.20 nursing home
37	Î.M. “Apă-Canal” Vulcăneşti		16	44	50	-
38	Î.S.I. “Acva-Nord”	4.05	-	4.05	-	-
39	Î.M. “Apă-Canal” Ocniţa	19.19	15.1	35.75	-	-
40	Î.M. “Servicii Publice” Cimislia	14.13	12	18	15	-

Note: AMAC has confirmed there have been no changes since 15 May 2015.

Source: AMAC data base acceded in August 2017

Annex 2.B. Report on proceeds of Expert Meeting, 16 November 2016

1. Objectives

The Expert Meeting was organised within the framework of the project on developing recommendations for the enhancement of the economic regulatory system (ERS) for water supply and sanitation (WSS) in Moldova. The objectives were:

• to obtain comments and discuss the content of the Interim Report

• to exchange views, facilitate dialogue from different stakeholders on the subject

• to increase understanding of the present state of the ERS for WSS in Moldova

• to highlight selected international practice with respect to aspects of the ERS for WSS

• to create a consensus among experts on the recommendations to be further elaborated.

2. Attendance

All major stakeholders had been invited and actively approached. The design of the ERS was important for all invitees as there are clear interests at stake for operators, municipalities, consumers, etc. There is also discontent with the present system among several stakeholders. The chosen venue was central and attractive with good facilities.

In this context, actual attendance fell short of expectations. This was mainly due to a parliamentary hearing on amendments in Law 303 on public service on water supply and sewerage. It was announced two days prior to the Expert Meeting, and took place at the same time.

Fortunately, there were still enough experts present to facilitate the planned exchange.

3. Issues discussed

Giel Verbeeck presented a summary of the Interim Report. After the presentation, the group split into two separate tables to facilitate a more informal discussion. Both tables had a lively discussion.

Discussion group 1 spoke about shortcomings in the ERS in the context of urban water supply, among other issues. The ambiguity in the law in the field of condominium buildings provides a difficulty. Operators cannot access or control internal networks of a building, and are not paid or requested to do internal plumbing. Still, operators may only invoice for the metered amounts at the apartment level. It is an institutional challenge to set incentives in a way that apartment owners can co‑operate and address major maintenance issues.

Discussion group 2 spoke about two subjects in depth. First, it examined the degree of regulatory discretion required. The law leaves the regulator little room. It is therefore difficult to set a tariff that sets an incentive towards performance improvement, while considering the capacity of the operator to improve efficiency over a reasonable time. Second, the group looked at the role of municipalities and how to provide for legislation and regulation that facilitates regional co‑operation.

A plenary discussion before the lunchbreak concerned options for reform. Most participants agreed on Option 3. This is the option aiming to make the new ERS work better, decisively addressing issues, but not starting all over again. The Ministry of Environment, however, prefers Option 1, even though this requires “going back to the drawing board”.

After the lunchbreak, Mr Verbeeck presented a synthesis of the discussion. Main conclusions were:

• law shall reflect principles, not be used for micro-management

• economic instruments as a promising policy area

• de-politicisation through implementation of EU acquis as an opportunity

• more work for tariff methodology if the first applications work out

• need of incentives and initiatives for regionalisation

• need for monitoring performance of operators, as well as that of policy

• follow-up for options presented in 2015 for social measures in WSS.

Several recommendations were presented:

1. Increase the transparency of water sector: operators, capital expenditure, budget and updatable projections of 3Ts that cover service, investment and policy.

2. Improve public finance through labelling all budgetary and extra budgetary support to WSS (and sub-labelling for, drinking water/non-drinking water, operating subsidies, capital expenditure, social or governance support).

3. Set up a development fund at operator level.

4. Step up the charges for water abstraction and pollution and manage these proceeds under a budgetary water fund (charges).

5. Maintain WSS commitment as per WSS strategy consolidated budgetary and extra budgetary sources.

6. Pilot a project on a rebate for poorest customers based on MoLSPF data, with potential and intention to scale up nationally if successful.

7. Consider limiting capital expenditure support projects to regionalising entities alone.

8. Consider swapping the preferential VAT treatment for a budgetary commitment to investment in the water sector.

Those recommendations were to be worked out in further detail in the Final Report.

At the end, a number of mechanisms/instruments in an improved ERS for WSS were graphically presented to clarify their workings. These included the rebate mechanism, a budgetary water fund, a development fund (similar to Romania’s Maintenance Replacement and Development funds). The graphical presentation proved useful and this will also be part of the Final Report.

4. Evaluation

The first four objectives mentioned at the beginning of the document have been met. With respect to the last objective, stakeholders will first await more detailed proposals before committing themselves. This is understandable.

It was a good decision to organise separate tables with smaller discussion groups. This allowed for more participation. Future events could safely make use of methods to increase participation such as by separation in groups, the use of statements to comment on, games, etc.

The content of the Interim Report has been disseminated through a wider group of persons than would have been the case if it had just been sent in for comment to the various stakeholders. The set up underlined the need for more genuine stakeholder collaboration in the water sector. The focus on experts, rather than on stakeholders, allowed for both more informed and more open discussion and less narrow focus on particular interests.

The Expert Meeting may have increased the acceptance and understanding of the need for further reform measures in the water sector as they are going to be formulated in the months ahead through this project, as well as other initiatives.

5. Agenda

 

9:00	9:30	Welcome and distribution of materials
9:30	9:40	Opening	Mr. Alexander Martusevich
9:40	10:25	Summary of Interim Report and progress made thereafter	Mr. Giel Verbeeck
10:25	10:45	Summary comments from stakeholder groups and questions for discussion in working group	By stakeholder group
10:45	11:00	Coffee break
11:00	12:00	Separate discussion groups working out specific measures	Mr. Levon Barkhudaryan Mr. Giel Verbeeck and others
12:00	12:30	Plenary presentation of the proceeds from the working groups	Discussion group moderators
12:30	13:30	Lunch
13:30	14:00	Synthesis: Outline of the recommendations to be elaborated	Mr. Giel Verbeeck
14:00	14:20	Final comments from stakeholders and experts	Mr. Alexander Poghossian
14:20	14:30	Closing address and steps ahead	Mr. Alexander Martusevich
14:30		Refreshments

Notes

← 1.  See http://mf.gov.md/actdoc/BOOST

← 2.  See http://mediu.gov.md/index.php/strategia/79-categorii-in-romana/despre-minister/institutii-subordonate/72-fondul-ecologic-national