copy the linklink copied!2. The state of play

Abstract

This chapter documents current levels of expenditure for water supply and sanitation, in the European Union. It reports on sources of finance in use (the 3Ts) and affordability issues. It provides a robust benchmark of the state of play across EU member states, which is used as a baseline in subsequent chapters of the report.

The chapter presents data on expenditures for flood protection as well. It analyses data gaps.

This part of the report characterises the state of play: compliance with selected Directives; levels of expenditures; and past sources of finance. It covers separately water supply, sanitation and flood protection. It compares the situation of the 28 EU Member States.

copy the linklink copied!2.1. Water supply and sanitation

2.1.1. Compliance and performance

The situation differs between water supply and sanitation. The Drinking water Directive was issued in November 1998. Based on a detailed assessment (EC, 2017a), it is acknowledged that the Directive has led to compliance with the microbiological and chemical parameters set in the regulation; compliance rates are only below requirements for indicator parameters that are of no direct threat to human health, such as taste and odour. This translates into improved safety for human health. Compliance has remained stable over the past years. Challenges remain to maintain the high level of compliance (which requires proper operation, maintenance and renewal of existing assets) and to adjust to the requirements of the revised Directive (still under discussion).

The primary instrument used in the EU to set the performance of wastewater services is the Urban Wastewater Treatment Directive (UWWTD). It mandates that wastewater from urban areas be collected and conveyed to a place of treatment. Treatment should be commensurate with the receiving waters’ capacity to cope with the residual pollutants. Treatment needs reflect compliance with other Directives, which contribute to the quality of freshwater in Europe by controlling emissions (Nitrates, Industrial Emissions Directives) or distinctive water bodies (Directives on groundwater or bathing waters).

In its biennial compliance assessment, the European Commission noted that 95% of the EU's urban waste water is collected with 89% receiving secondary and 85% more stringent treatment in line with the UWWTD requirements (EC, 2017b). Trends in compliance have been positive, with major gains made in the EU-13 since 2009; compliance rates have declined since the previous review from the European Commission, reflecting more accurate reporting. Nevertheless,

Four member states have compliance rates on collection rates below 70% (Bulgaria, Cyprus, Romania, Slovenia). Collection rates decreased from the 8th Report due to the inclusion of Italy, Poland and more accurate data for Romania. Cyprus and Spain have failed to maintain or improve earlier compliance rates.
Several member states have very low compliance rates as regards secondary treatment (Bulgaria, Malta, Romania, Slovenia). So does Ireland (because of a specific problem in Dublin in 2014).

As mentioned above, for all member states, an additional challenge is to operate, maintain and renew existing assets (European Commission, 2015), to guarantee service quality over time. The rate of asset renewal is not known with accuracy. When it is documented, it is well below the rate of 2%, which is considered by EurEau as appropriate (assuming that assets for water supply and sanitation need to be renewed every 50 years, on average 1). There is a paucity of data, confirmed in the Figure below. For countries where data is available, rates of renewal can be as low as 0.5%, indicating that infrastructure would only be renewed every 200 years, by far exceeding the life expectancy of the equipment. This confirms the EIB statement that "much of Europe's vital drinking water supply and wastewater management infrastructure is reaching the end of its economic life" (EIB, 2016, p. 34).

Figure 2.1. Rate of asset renewal for water supply & Rate of asset renewal for sanitation

2.1.2. Expenditure levels

Reference data (annual average for the period 2011-2015) was computed based on a range of Eurostat datasets covering various parts of water-related public and household expenditure (see Annex A for further details). Such data made it possible to establish separate baselines of total expenditures for water supply and sanitation respectively (Figure 2.2). These figures combine both CAPEX and OPEX.

The main limitation of the baseline data used is that it likely over-estimates water supply (and correspondingly underestimates water sanitation) for countries where wastewater-related charges are included in the water bill. Overall, baseline estimates point out to an annual average expenditure of EUR 100 billion across the 28 EU member states, with the lion’s share attributable to EU15 (Germany, France, United Kingdom and Italy in particular).

Figure 2.2. Estimated annual expenditures for water supply and sanitation for the EU-28

Figure 2.3. Estimated annual expenditures for water supply and sanitation per member state

Figure 2.4. Estimated expenditures per capita for water supply and sanitation in EU-28

Figure 2.5. Estimated annual expenditures per capita for water supply and sanitation per member state

Figure 2.6. Estimated expenditures per capita and as % of GDP

For the record, EurEau (2017) reports that, water supply and sanitation utilities invest EUR 45 billion annually in Europe. On average, this represents EUR 93.5 per habitant and per year. This average masks large discrepancies (a factor 10 or more) between member states where utilities invest the least (Czech Republic, Greece, Italy, Malta, Romania, or Slovakia) and countries where they invest the most (Slovenia).

2.1.3. Sources of finance

As aforementioned, estimates of total expenditures in each country were derived from data on current levels of water-related expenditures by the public sector and household respectively. Complementary data sources were then used to estimate the share of total expenditures having relied on EU funding and debt finance. In other words, EU funding and debt are not considered as additional to WSS expenditures but as underlying sources of financing. All data series are further detailed in Annex A.

Figure 2.7 documents the share of the public budgets (consolidated across levels of government) and revenues from water tariffs (i.e. households) in total expenditures. Getting closer to a 100% share of tariffs demonstrates an increasing ability to rely on pricing to finance both capital and operational expenditures. A close to 100% share of public budgets illustrates an absence of pricing. In between the two extremes, a wide range of factors may explain countries’ relative positioning on this spectrum.

The data sources cover neither Croatia nor Sweden. An analysis of financial flows in selected countries by EurEau (2018) indicates that in Sweden the costs of service provision are essentially covered by revenues from tariffs. However, taxation is possible according to the legislation; and a few small municipalities subsidise water services through their own local budget. In Croatia, households connected to water supply and sanitation infrastructure typically pay tariffs, in line with the principle of full-cost recovery, although subsidies exist when charges exceed a price cap relative to household income (Danube Water Programme, 2015).

Figure 2.7. Sources of finance for water supply and sanitation services for the EU-28

Figure 2.8. Sources of finance for water supply and sanitation services per member state

Figure 2.9 illustrates the extent to which member states’ total WSS expenditures (as presented in Figure 2.3 and characterised in Figure 2.8) have been reliant on EU cohesion policy funds (in particular the European Regional Development Fund and the Cohesion Fund) (in most cases provided as grants). The situation varies extensively across countries. In about one third of the Member States, cohesion policy funds have not been extensively allocated to water management over the 2007-2013 and 2014-2020 periods. On the other end of the spectrum, they represent more than 20 % of total expenditure in 8 Member States (and up to 50% in Estonia). National figures may differ from a different study, which covers a longer time period, allowing to factor in expenditures committed 2 year after the end of the financing period (N+2 rule; see COWI, Milieu, 2019).

Figure 2.9. Share of EU funding in estimated total expenditures for water supply and sanitation for the EU-28

For a given country (Figure 2.10) a relatively high share of EU funding in total expenditures may result from a number of country characteristics including: the existence of less developed regions, where the bulk of the European Regional Development Fund is invested; access to the Cohesion Fund; an overall low level of expenditures (Figure 2.5 and Figure 2.6), limited domestic financing capacities (see Part IV).

The capacity to apply for funds and spend them effectively matters. In some countries, administrative capacity to design, implement, or operate projects has been the bottleneck: while money was available, projects could not be implemented without delays; or while infrastructures had been built, they remained idle for lack of capacity to operate them.

A complementary analysis of member states’ ability to use EU funds effectively was conducted for this project but was inconclusive due to data limitations. Addressing these limitations requires further examination of detailed individual country characteristics, such as institutional arrangements or project pipelines. Of note, in Cyprus, a significant expenditure programme for sanitation was implemented during 2011-2015, funded from the EU cohesion funds; the funding was implemented through the Public Budget.

Figure 2.10. Share of EU funding in estimated total expenditures for water supply and sanitation per member state

Countries may also recourse to debt (reimbursable) finance (Figure 2.11). Doing so typically contributes to financing upfront capital investments where cash flow may be insufficient for on-balance sheet financing or borrowing conditions particularly attractive.

Figure 2.11. Share of debt in estimated total expenditures for water supply and sanitation for the EU-28

In any given country (Figure 2.12), accessing debt financing will typically be restricted to entities and projects able to demonstrate a reliable ability to pay back. For WSS service providers, such ability is first and foremost dependent on the extent to which costs are recovered through revenues from tariffs or other charges paid by users (see Section 2.1.4 for an analysis of price and affordability; see the Box 2.1 below for a relevant illustration in Sweden). In addition to pricing, the financial health of the entity will greatly influence its ability to access debt finance. For instance, banks are likely to lend to a municipality with low water prices but with a demonstrated ability to raise taxes and featuring a low level of indebtedness (see Part IV for a further analysis of financing capacities).

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Box 2.1. Financing needs and capacities for WSS in Sweden

Swedish Investors for Sustainable Development (SISD) is an initiative by SIDA, involving the Swedish Church, AP7, AP3, Skandia and SPP. SISD has focused on investments needed to in Sweden to meet SDG 6. The review indicates that there is more capital than there are investment opportunities within sustainable water and sanitation. The group also came with a series of conclusions, which resonate with the developments in this report:

The need for investment in water and sanitation infrastructure is large and increasing due to slow renewal rates. Future legal requirements for the disposal of drug residues and micro-plastics can become important factors in investment decisions.
New investment tends to override necessary maintenance.
Access to funding is available. However, investment is still refrained for several financial reasons.
There is an unwillingness to borrow. The municipalities’ indebtedness reduces the willingness to invest and, despite the fact that water and sanitation should be kept separate from other municipal activities, these loans are regarded as included in the total debt.
The politicians who determine the water tariffs reject raising the tariffs, which also limits the investment rate.
Private ownership of water and sanitation infrastructure is not legal in Sweden, which may also restrict private investment.
Green bonds are used and will increase in importance. A governmental investigation is due in November.
The provision of skills is a major problem. Large demand for consultants, contractors and staff limits the possibilities to reinvest in and maintain existing infrastructure. It is difficult for especially smaller municipalities to manage long-term strategic planning.

Source: AP7 (2017).

Figure 2.12. Share of debt in estimated total expenditures for water supply and sanitation per member state

2.1.4. Affordability

As mentioned above, pricing is a key element to make WSS services financially sustainable. However, assessment of the second cycle of implementation of river basin management plans indicates that one third of the countries apply cost recovery to a narrow definition of water services, limited to water supply and sanitation services. Compared to the first generation of RBMPs, several countries now apply cost recovery to a wider range of water services, including hydropower generation, navigation, flood protection, or self-abstraction for agriculture and industry. This observation corroborates analyses by WAREG (2017) - the network of water regulators - that full cost recovery through tariffs has not yet been achieved in many EU member states, preventing the sector from being adequately funded.

Affordability concerns, whether perceived or effective, may restrict the ability to use and increase price as a way to recover costs of service provision. In this context, Figure 2.13 plots the share represented by per capita average expenditure for WSS in the lowest 5% and 10% household disposable income 2.

Based on current household expenditure levels, all countries remain below the 3% threshold 3 if considering the lowest quartile and quintile. In a number of countries, shares for the lowest 10% and even more so for the lowest 5% tend to be significantly higher (compared to other EU Member States), which typically reflects a drop in income levels (income inequality).

Figure 2.13. Share of water supply and sanitation expenditures in households’ disposable income

The data above come with two caveats. First, on-going research (in particular by Guy Hutton or Bob Hope) demonstrates that the statistics above fail to fully capture the complexity of affordability issues. Typically, poorest and most vulnerable households may not pay for public water supply and sanitation, because they are deprived from access to any service. This is typically the case of migrants, homeless, or remote and rural communities.

A second caveat is that estimates presented in Figure 2.13 remain dependent on current level of household expenditures, which in turn very much depends on the extent to which water is actually priced. Hence, affordability issues will be underestimated or may even go unnoticed in countries with a combination of low overall expenditure levels and low to no pricing. On the other hand, countries with reasonably low affordability concerns despite relatively high water prices are in principle in a better position. Section 4.1.1 further develops this discussion by simulating the effect of cover the full cost of WSS through water tariffs (based on current expenditure levels).

copy the linklink copied!2.2. Flood protection

The Floods Directive mandates the development of Flood Risk Management Plans. However, countries vary in their capacity to draft relevant planning documents and their capacity to implement (and finance) them. A recent inventory of first set of Flood Risk Management Plans (FRMPs, 2016) indicates that cost estimates of flood prevention and mitigation measures were reported by about half of the Member States assessed. In many cases, data was only partial (European Commission, 2019a).

In a recent report, the European Court of Auditors signalled that climate change is not properly factored in national plans, as countries rely on past trends to project flood risks. Moreover, implementation of plans can be lax, as plans often lack timelines for implementation and are not accompanied by a financing strategy commensurate with planned expenditures (ECA, 2018).

The Floods Directive does not specify any particular level of security against flood risks. The appropriate level of security remains a political decision, set at country level (OECD, 2013). That decision can be informed by assessments of exposure to risks and of the costs of protection, now and in the future. For instance, in France, the appropriate level of security is set at local level (PAPI) and supported by socio-economic analyses. The point is that no European regulation sets a reference to assess the position of countries as regards performance on flood protection.

Levels of awareness and engagement to mitigate flood risks vary significantly across EU member states. This reflects levels of exposure and experience with flood risks.

2.2.1. Expenditure levels

As further detailed in Annex A, it was not possible to establish a robust baseline of current expenditures, as flood protection does not correspond to a sector or subsector in any international statistical standards/ international classifications. Further, survey data reported by member states are very patchy and unequal (European Commission, 2017c).

Data on projected costs of measures to mitigate flood risks are also incomplete and do not warrant cross-country comparison. The European Commission notes that less than half of member states reported the costs of measures in the first flood risk management plans, and where they exists, reports are incomplete (European Commission, 2019b). Based on that information, the total amount of public finance dedicated to flood protection amounts to EUR 3,070 million per year for the period 2011-15, on average; 3/5 originate in EU 15 countries (Figure 2.14). Note that the order of magnitude matches with the estimate in the Fitness Check: “According to the costs of measures reported in the FRMPs, Member States should invest upwards of €12.5 billion between 2016 and 2021” (European Commission, 2019a, page 57).

Some countries were able to monetise expenditure needs for flood protection in the second generation of river basin management plans. While data in the second generation of plans is a marked improvement over the previous generation, it is not comprehensive enough to support cross-country comparisons: i) not every country has provided such projections; ii) it is not clear whether the countries have used similar definitions and methods.

Figure 2.14. Estimated public budget expenditure for flood protection for the EU-28

Only very few member states reported robust data, which are essentially those most exposed, which invested heavily in flood protection. The only data available relates to public budget expenditures with no records of possible household or other private expenditures. A qualitative overview of potential innovative financing mechanisms and sources can be found in Chapter 5.4.

Reported cost data for the Flood Directive in the Member State compliance assessment reports shows high variability. As an illustration, the Fitness Check calculated average capital costs per inhabitant, and those vary from EUR 0.2 in Estonia, to EUR 261 in Slovenia (European Commission, 2019a, pp.116-7).

Figure 2.15. Estimated public budget expenditure for flood protection per member state

2.2.2. Sources of financing

Similarly to WSS in the previous section, Figures 2.16 and 2.17 display the share represented by EU funding in the domestic public budget expenditures for flood protection for each member state. In EU-13 countries, that share amounts to 3/5 of the total expenditure for flood protection.

The FRMPs are not a robust source of information to document sources of finance. Funding sources are mentioned, but more often as potential funding mechanisms than as budgetary commitments.

Figure 2.16. Share of EU funding in public budget expenditures for flood protection for the EU-28

Given the unreliability of expenditure data, these shares should, however, be interpreted with extreme caution. For instance, the fact that one country in three exhibit shares of 100% is, for some, due to the absence of comprehensive domestic public expenditure data, i.e. the only robust data was EU funding.

Figure 2.17. Share of EU funding in public budget expenditures for flood protection per member state

References

AP7 (2017), Förstudie: Vatten som investeringsobjekt (with an English Foreword)

COWI, Milieu (2019), Integration of environmental concerns in Cohesion Policy Funds (ERDF, ESF, CF). Results, evolution and trends through three programming periods (2000-2006, 2007-2013, 2014-2020). Final report, European Commission, Brussels

Danube Water Program (2015), Water and Wastewater Services in the Danube Region: A State of the Sector. Regional Report. Danube Water Program. World Bank, Washington, DC.

DANVA (2019), Water in Figures, Danva Statistics & Benchmarking

EurEau (2018), Briefing note. Update on the 3Ts, Brussels

EurEau (2017), Europe’s water in figures. An overview of the European drinking water and waste water sectors, Brussels

European Commission (2019a), Fitness Check of the Water Framework Directive and the Floods Directive, Brussels

European Commission (2019b), Implementation of the Water Framework Directive (2000/60/EC) and the Floods Directive (2007/60/EC). Second River Basin Management Plans. First Flood Risk Management Plans, Brussels

European Commission (2017a), Study supporting the revision of the EU Drinking Water Directive, Luxemburg, doi:10.2779/650074

European Commission (2017b), Ninth Report on the implementation status and the programmes for implementation of Council Directive 91/271/EEC concerning urban waste water treatment {SWD(2017) 445 final}

European Commission (2017c), Flood Risk Management in the EU and the Floods Directive's 1st Cycle of Implementation (2009-15). A questionnaire based report.

European Court of Auditors (2018), Special report no 25/2018: Floods Directive, Luxemburg

European Investment Bank (2016), Restoring European Competitiveness, Luxemburg

OECD (2020), Addressing the Social Consequences of Water Tariffs, OECD Working Papers, Paris

OECD (2013), Water Security for Better Lives, OECD Studies on Water, OECD

WAREG (2017), An Analysis of Water Efficiency KPIs in WAREG Member Countries, WAREG

Notes

← 1. That figure is indicative only and cannot be taken as a norm or standard. The average masks differences across assets. In principle, most pipes and networks have longer life expectancy than pumps and treatment facilities.

← 2. It should be noted that analysis of affordability issues in this report do not rely on tariffs for water supply and sanitation services, but on data on households expenditures. Country-level average prices for water supply and sanitation are not accurate and cannot support robust cross-country comparisons.

← 3. It is worth noting that, while 3% is used as a proxy for affordability limit, such a threshold is highly debatable. The level does not build on any robust assessment. The very concept of a threshold is being challenged. See work by Hutton, Wittington. See also OECD Working Paper (forthcoming 2020) The Social Consequences of Pricing Water, for a discussion.

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OECD Studies on Water: Financing Water Supply, Sanitation and Flood Protection: Challenges in EU Member States and Policy Options

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