From 400 to 41 water supply and sanitation utilities in 4 Years: Lessons from Hungary’s experience with aggregation

This story forms part of World Bank’s Toolkit on the Aggregation of Water Supply and Sanitation Utilities Aggregation that includes a series of case studies (including Hungary). The toolkit is based on the findings of the new World Bank global study entitled, “Joining Forces for Better Services? When, Why, and How Water and Sanitation Utilities Can Benefit from Working Together“.

Inside a water utility in Hungary. Credit: Veolia 
 

In today’s Hungary, safe piped drinking water is available 24 hours a day, and three-quarters of all households nationwide are connected to sewers. The country is located in the large central European Carpathian basin, which provides an ample fresh water supply, alongside rivers that bring plenty of water from their far-reaching catchment areas.
 
Despite these favorable water conditions, water supply and sanitation (WSS) systems were not always reliable or sustainable throughout Hungary’s history. Located on the eastern edge of the European Union, the country has faced significant political and economic changes that have markedly affected the sector.
 
In this context, how did Hungary transition from a largely fragmented WSS sector to an aggregated system in just 4 years? To answer this question, it is helpful to understand a brief history of WSS utility aggregation in Hungary – particularly during the past three decades in a post-communist era.
 
A Brief History of Water Supply and Sanitation in Hungary
 
In the Hungary of 1949, within the framework of a Communist country with a state economy, water utilities were owned and operated by the state. 
 
In 1989, the political regime changed to a democracy and market economy, which resulted in important shifts within the WSS utility sector. Most assets were transferred to local governments, along with the obligation to provide water utility services and the freedom to reorganize the service providers. The transfer precipitated a process of WSS utility fragmentation. Municipalities began to split up water utility companies, driven by their desire to secure local independence.
 
By 1990, there were 38 WSS utilities in Hungary.
 
By 2010, there were more than 400 independent operators in Hungary. Municipalities that longed for independence in WSS utility services were indeed able to attain it. Such autonomy, however, came at a price: the operating efficiency of small water utilities dropped compared to that of their larger peers, and the sustainability of WSS delivery services started to diminish. The declining sector was viewed as detrimental to economically efficient operations, and was largely attributed to industry fragmentation.
 
The 2011 Hungarian Water Utility Act Stirs the WSS Utility Sector
 
At the end of 2011, to reverse this trend, the Hungarian national government adopted the Water Utility Act. The act required water utility companies to reach a minimum size, meaning that sector players were essentially forced to merge. The act established a central regulatory agency for water utilities, prescribed a minimum size requirement as a precondition for obtaining an operating permit, and anticipated enforcement of rules for cost-recovering tariffs. The act stipulated that by the end of 2016, all WSS utilities were to achieve a size of at least 150,000 consumer equivalent. Because most of the 400 or so water utilities were below the threshold size level, those companies were forced to seek mergers with other service providers.
 
Discussions evolved among affected municipalities; long rounds of negotiations took place; and water utilities undertook market valuation, as well as understood the value of their neighboring companies.
 
The consolidation of the WSS sector continued for the next two years. Some of the operating contracts between small municipalities and larger water service providers were signed only at the last moment, as the municipal decision makers were reluctant to lose control or expected better terms. Some municipalities were left without an operator. (In that case, the newly established regulator assigned an “operator of last resort”—a nearby water utility.) Overall, the goal of policy makers was achieved, and by the end of 2016 the number of water utility companies dropped to 41.
 
Lessons from the Hungary Experience with WSS Utility Aggregation
 
WSS utility aggregation in Hungary resulted in reduced service costs as well as improved service quality in smaller settlements. For example, a case study on Alföldvíz (Great Plains Water) in Hungary shows that aggregation appeared beneficial, especially for service quality and sustainability in small municipalities. The Alföldvíz aggregation brought about a clear increase in economic efficiency but only a slight increase in performance. Unit operating expenditures declined, whether compared to the number of water connections, the volume of produced and sold water, or the population served with water (see figure below).

Economic Efficiency of Alföldvíz Utility. Source: World Bank Case Study – Alföldvíz, Hungary.

However, the Hungarian experience demonstrates that challenges can arise in multiple stages of the aggregation process; and that not all stakeholders benefit. Some municipalities were unable to achieve attractive-enough conditions during merger negotiations, and water utility companies that were unable to reach the prescribed size had to be closed. In addition, aggregation was planned to be part of a larger water utility reform package, but the regulations on establishing cost-recovering tariffs still have not passed. In 2013, the government introduced new regulations that reduced water and sanitation tariffs paid by households, in parallel with the launch of a public utility tax affecting the water utilities. The case of Kiskun-Viz demonstrates that political resistance may occur when choosing utility headquarters location and nominating CEOs, in addition to potential difficulties retaining skilled staff because of financial constraints.
 
WSS utility aggregation is a fairly new phenomenon, and opportunities for further in-depth research abound. Whether the Hungarian experience of administratively imposed WSS utility aggregation can be repeated in other countries remains a question. With a careful approach and consideration of context, aggregation may be seen as one potential tool to bolster the efforts of helping to provide clean and safe water for all.
 
To learn more about other countries that went through similar experiences, as well as about what has worked and hasn’t worked in multiple cases, visit the World Bank’s Toolkit on the Aggregation of Water Supply and Sanitation Utilities and global report Joining Forces for Better Services? When, Why and How Water and Sanitation Utilities Can Benefit from Working Together.
 
Editor’s note: In the context of WSS aggregation, efficiency is defined as the resource use per delivered service. A service provided is more efficient when a higher quality of service is provided at the same effort or when lower inputs (resources) are needed for a given quality/level of service.
 

The views expressed in this blog are those of the author alone. Publication does not imply endorsement of views by the World Bank.

 

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