Document Actions
Economic Situation
Up one level
5.5. Economic Situation
The BWTP infrastructure is in poor shape – especially for a utility serving a population of 2.7 million and the country’s capital industry – and requires immediate modernization. With the last major renovations/upgrades over fifteen years ago, and traditional approaches for management and upkeep of public utilities of this magnitude dictate constant investment, the priority of modernizing this key civic asset is critical. The following outlines a range of key concerns. A comprehensive list of challenges and concerns of KVK are identified in a table later in this section.
Based on preliminary screening of Hot Spots on economic criteria for Phase 1, among candidate sites, KVK was determined to (scores indicate relative severity of problem based on qualitative data and professional judgement):
- Have a negative impact on the downstream water supply (Score 60 out of 100)
- Have an average cost of treatment for drinking water higher than the national average cost of treatment of drinking water. (Score 70 out of 100); while the average cost for treatment of individual water was higher too. (Score 55 out of 100).
- Require the highest level investment to meet EU water standards. (Score 50 out of 100)
- Incur the highest loss of available land due to its sludge drying beds (Score 100 out of 100).
- Based on Macroeconomic criteria, make a substantial contribution to the national economy; and
- Due to serving Kyiv’s working population, make a substantial contribution to regional industrial employment.
Beyond this preliminary assessment, almost all of treatment elements the BWTP, from intake to sludge management, require upgrading. Beyond the country’s exisiting economic position, much of the problem lies in former accounting systems and business practices that did not allocate funds for capital maintenance, upgrades and re-investment. As such, with Ukraine’s move to a market economy and utility’s designation as a joint stock company, the KVK, and especially the BWTP, have inherited a challenging financial position. Even increased reinvestment efforts are inadequate.
“KVK’s has increased its rate of capital reinvestment as a percentage of total fixed assets. In nominal terms, and as a percentage of the remaining book value, KVK’s rate of capital reinvestment has increased from 1.5% in 1996 to 4.7%. In constant terms, and as a percentage of the estimated current replacement cost, its rate of capital reinvestment has increased from 0.41% in 1996 to 0.52% in 1999. Despite these efforts, the level of capital reinvestment is only equal to roughly 1/5 of the level of technically recommended to appropriately maintain their existing assets and service levels. Combined with an inadequate level of maintenance and repair, which has been estimated to equal approximately 1/3 of that technically recommended, KVK’s facilities have generally deteriorated such that the existing level of service will be difficult to maintain without major injections of capital reinvestment in the near to medium term future1)”.
This financial position has forced the KVK to prioritize its key investments. It has led the utility to review all aspects of its operation to determine strategically where emphasis should be placed to improve the solvency of the entire operation. A study funded by the Danish Environmental Protection Agency2) noted that the major financial gains were to be found on the supply-side (i.e. distribution of water). In fact, the study recommended that “environmental” concerns accounted for only 15% of the weight in ranking of projects. (“Maintaining System Reliability” and “Improved Knowledge of Facilities” were higher ranked criteria). However, there are challenges with the supply side relative to the entire operation of the Utility:
“KVK’s financial performance has deteriorated over the past four years. It’s operating margin has fallen from 26% in 1996 to <1% in 1999, in part as a result of a 72% increase in its total cost of operations, and it has experienced increasing losses over the last two fiscal years. While m3 sales have declined by 6%, UAH sales have increased by 30% as a result of tariff increases. However, UAH collections have not kept pace, and KVK’s collection rate has fallen by 18% of current sales or 60% of total outstanding collections. As a result, KVK’s ability to service immediate and short term obligations is increasingly at risk, and in 1999 its cash requirements exceeded cash in-flow from operations.”
While greater revenue generation has been determined to be a desirable objective, there have been problems associated with its pursuit. As indicated in our discussion while on our site visit in October 2003, the National Government approved a rate structure that allowed water utilities to charge rates to cover operational costs plus 20%. This 20% charge was supposed to be earmarked exclusively for re-investment in water treatment. However, the public have been feeling the crunch of the cost of living rising much more rapidly relative to wage growth.
“Kyiv City covers 836 km2 and had a 1999 population of 2,626,000. In recent years the population has decreased slightly, but it is expected that the population growth will soon start to increase again.
Household incomes are low with an average monthly expenditure of about 138-157 UAH/person/month2, payment for water services compromises a high proportion (about 4.8%) of the average expenditure. Although there is an expressed willingness by consumers to pay up to about 50% higher tariffs if 24 hours water supply is maintained and the water quality is improved, the current payments must be assessed as close to the absolute maximum affordable level.
Water is paid for by the consumers by the norm figure (300 lcd) although the Housing Associations are billed the actual consumption (estimated 347 lcd).”
Due to public pressures, the Government now has restricted utlities’ ability to raise water tariffs. With electricity rates that have grown substantially over the last ten years, it is anticipated that such restrictions will remain for the immediate future. In fact, one of the main costs facing KVK is energy – thus, while subject to higher electricity costs, they are unable to pass these higher costs back to industrial, residential and institutional users.
Regulation and enforcement continues to impede the financial performance of the facility. In fact in the first eight (8) months of 2003, the BWTP paid 601,700 UAH in taxes, plus fines in the form of discharge fees. The latter is also a substantial cost to the facilities operation. The Government collects these fees as required, but, due to other economic pressures, does not redirect them to their earmarked environmental protection measures.
Another dimension to the pressures faced by the KVK is residential water usage. The Danish EPA funded study identified that the daily household consumption (347 lcd) is more than two times the rate of Western and Eastern European norms. The habits of residents dictate a preference for running water. Hence, little is done at the household level to conserve water. Any demand-side encouragement such as public education programs (combined with prescribed metering) would likely alleviate the volume of wastewater requiring treatment.
While the overall economic situation for KVK is particularly challenging, the status of the BWTP is critical. Due to the plant being the primary city facility for treating residential, industrial and institutional wastewater, its inefficient operation will continue to discharge contaminated water in to the Dnieper River. The plant, at present operates at a loss due to the lack of revenue and substantial energy and treatment costs. Should the existing operation situation be maintained, these losses will increase substantially for years to come as Kyiv’s population and industrial production grows.
Thus, beyond programs such as encouraging industrial water users to reduce their discharges, given the focus of reducing pollution into the Dnieper River, the primary objective for KVK with respect to the BWTP, is to adopt energy efficient sustainable processes. Such processes should focus on reducing operating costs, and whose savings could be redirected to improved maintenance and cover the cost investment, independent of other actions undertaken by the rest of KVK and regulating authorities.
_________________________
1) – Findings of the evaluation of KVK’s financial position as at December 31, 1999, and its financial performance over the last four years starting 1996, are detailed in Chapter 12 of the Working Document No. 1 – Existing Situation.
2) – “Renewal and Modernization of the Kviv Vodokanal – Working Document No. 3 – Reform and Corporate Development”, COWI, July 2000
