Experiences of Budapest Waterworks with state, municipal ownership structures and with the involvement of private funding: case study of Budapest Waterworks
T. Bencze & E. Mindak
This post is a summary of an article published in Water Practice & Technology. The full paper is available here.
In Central Europe, privatization happened in the era of general political and economic transformation. The importance of privatization is understandable given the specificity of the formerly planned economies, where almost all productive assets were in the possession or under tight control of the state. Privatization in Central and Eastern Europe (CEE) countries is unique; the number of assets that changed owners is huge and touched upon almost all sectors of economy. Privatization promised to increase efficiency through the creation of real ownership. However, privatization in itself proved to be an effective but not a sufficient condition for creating efficient corporate governance in formerly communist countries.
In the 1990s in water and sanitation of Budapest the over-aged water network needed heavy investment, since the low water tariffs of the past decades did not allow a proper yearly reconstruction budget and no resources were available from the Municipality to support reconstruction. Furthermore, strategic investors were needed for the support of technology transfers, safe operations and customer orientation, whereas organisational and technical inefficiencies/processes needed to be reengineered and improved. All these imperatives led to the involvement of private funding.
After several decades of socialist-planned economic initiatives and after the collapse of the socialist regime, Budapest Waterworks started to operate in Public Private Partnership (PPP) schemes by two professional investors (SUEZ Environment, and RWE Aqua GmbH). Public Private Partnership brought many benefits, namely the cross-transfer of public and private sector skills, leading to efficiency improvements and development.
In June 2012, the shares of Budapest Waterworks were repurchased by the Municipality of Budapest after lengthy negotiations with the investors
One of the main reasons of the early termination of the contract was that the duration of the contract proved to be too long. As in the case of Budapest Waterworks the management rights were purchased for 25 years which, in such a transitional period of time that Hungary was going through, seemed to be unnecessary. The added value of the investors drastically decreased after 15 years. However, the return on investment on the investors’ side is calculated for the complete duration of the contract, which caused continuous tension between the city management and the operators. Consumers have to pay the management fees or profits of the investors; while the private owners may only be interested in reducing costs, that only the local government may be sensitive to socials issues, especially as it happened after the municipal elections in 2010.
In 2010 a new political party came into power, which considered the ownership of natural resources such as water of strategic importance and decided to return key assets to community ownership.
Eventually, the mechanism of the contract did not regulate well the continuous revision of the provisions of the agreement. The lack of proper contract management was one of the underlying reasons for the change.
To sum up: there is an almost desperate need for new investments in traditionally neglected sectors such as public transport, water and waste water management, natural gas supply and solid waste management, for which PPP can offer one solution. Successful implementation of Public Private Partnership is a challenge for all, especially in the water sector. Each case shall be adapted to local conditions having considered pros and cons of each type of private funding. Moreover, it is crucial for the contracting authority to understand the drivers that attract private funding.