Executive Summary
The economic regulatory system (ERS) for the water supply and sanitation (WSS) sector in the Republic of Moldova (hereafter “Moldova”) is going through a period of change. The policy framework calls for drastic development in WSS, based on both domestic and international commitments. Foremost among these are the Association Agreement with the European Union, the Sustainable Development Goals (SDGs), the Paris Agreement on Climate and the national WSS strategy.
The firm commitments contrast with the capacity of government to provide sound economic regulation and with WSS operators’ capacity to live up to much higher standards. Meanwhile, the affordability of WSS services is a genuine concern in Moldova. Apart from perhaps a small number of local initiatives, there are no WSS-related social protection measures in Moldova. At existing tariffs, the national WSS strategy has an annual funding gap of EUR 21 million. To close this gap, tariff rates must rise by 30% on average. Operators need to take drastic measures to modernise and optimise WSS systems, reduce non-revenue water, and improve staff-output ratios and other indicators of operational efficiency.
Such a transition cannot happen overnight. It requires a conducive ERS that considers affordability, the need for cost recovery and debt servicing, and a realistic performance improvement path for water utilities. This is a challenge that requires a concerted effort from all actors that make up the ERS in Moldova. To achieve the transition, the actors need to consider best practice in economic regulation and learn from specific country experiences.
International good practice explains more about the optimal “how” of economic regulation than the “what”. The “how” considers issues such as the right incentives, transparency, dialogue and stakeholder consultation, clarification of roles and performance evaluation. Experience from the selected reference countries provides lessons on the “what”. This includes development of the regulatory framework and social measures in Chile; Dutch experience with regionalisation and sharing the disproportionate investment burden on smaller agglomerations; social benefits and costs of the Flemish dual block tariffs; and the rationale behind regulatory reform in Kazakhstan. This experience is potentially applicable in Moldova, but differences in capacity and income must be considered.
Three scenarios of reform options outline how the development of the ERS can progress in Moldova:
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1. “De-bottlenecking”
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2. “Back to the drawing board”
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3. “Completing and reorganising the system”.
The scenarios and associated actions were discussed with local stakeholders through the on-going National policy dialogue on water in Moldova, and consensus was built that though the second option shall remain open, policy makers shall be encouraged to pursue the third option. Based on the discussion, 20 recommendations were formulated. The first two recommendations are to: 1. Re-establish the national WSS Commission to lead and steer the reform; and 2. Perceive the economic regulator of WSS as a broker in relations between customers and operators. While the others are grouped under the following seven policy objectives: (I) Introduce the right incentives, including a tariff that encourages operators to perform better and end users to save water; (II) More decisively regionalise WSS services; (III) Facilitate nurturing of sustainable business models; (IV) Use an optimal mix of tariffs, taxes and transfers (“3Ts”), based on an up-to-date sector strategy; (V) Improve the use of economic instruments to achieve set WSS policy objectives; (VI) Use external finance to bridge the projected funding gap; and (VII) Apply well-targeted WSS-related social protection measures.
The recommendations are related to one another, making it difficult to pick and choose. Yet there is considerable room in the way these recommendations may be implemented and, wherever possible, for local customisation. The indicative implementation plan proposed in this report is therefore meant, foremost, to show a conceivable implementation framework. It has been drawn up in the understanding that many activities, responsibilities, outputs and milestones will require further elaboration and blueprinting during the process. Policy makers and stakeholders shall make a start and assess the following along the way: (i) the need for, and the content of, required legal or regulatory amendments; (ii) the more exact needs for Technical Assistance; and (iii) a plan for implementation of specific activities (e.g. a mid-term action and investment plan).