Social Policies and Private Sector Participation in Water Supply – The Case of Hungary. Working Paper Prepared for the UNRISD project on Social Policy, Regulation and Private Sector Involvement in Water Supply. Geneva: UNRISD, 2006.

The intention of this paper is to investigate how private sector participation (PSP) in the water supply industry impacts upon the poverty related issues of equity, access and affordability and how social policies are designed to help the poor. We

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   1  Boda et al, April   2007 UNRISD U NITED N  ATIONS R ESEARCH I NSTITUTE FOR S OCIAL D EVELOPMENT   “Social policies and private sector participation in water supply – the case of Hungary” Zsolt Boda, Corvinus University of Budapest, Hungary Gábor Scheiring, Corvinus University of Budapest, Hungary Emanuele Lobina, University of Greenwich, London, UK David Hall, University of Greenwich, London, UK  prepared for the UNRISD project on “Social Policy, Regulation and Private Sector Involvement in Water Supply” DRAFT WORKING DOCUMENT Do not cite without the authors’ approval   2   The United Nations Research Institute for Social Development  ( UNRISD ) is an autonomous agency engaging in multidisciplinary research on the social dimensions of contemporary problems affecting development. Its work is guided by the conviction that, for effective development policies to be formulated, an understanding of the social and political context is crucial. The Institute attempts to provide governments, development agencies, grassroots organizations and scholars with a better understanding of how development  policies and processes of economic, social and environmental change affect different social groups. Working through an extensive network of national research centres, UNRISD aims to  promote srcinal research and strengthen research capacity in developing countries. Research programmes include: Civil Society and Social Movements; Democracy, Governance and Well-Being; Gender and Development; Identities, Conflict and Cohesion; Markets, Business and Regulation; and Social Policy and Development. A list of the Institute’s free and priced publications can be obtained by contacting the Reference Centre. UNRISD, Palais des Nations 1211 Geneva 10, Switzerland Tel: (41 22) 9173020 Fax: (41 22) 9170650 E-mail: Web: Copyright © United Nations Research Institute for Social Development (UNRISD). This is not a formal UNRISD publication. The responsibility for opinions expressed in signed studies rests solely with their author(s), and availability on the UNRISD Web site ( does not constitute an endorsement by UNRISD of the opinions expressed in them. No publication or distribution of these papers is permitted without the  prior authorization of the author(s), except for personal use.   3 Contents 1. Introduction 2. Characteristics of the Hungarian water sector 2.1. The meaning of access and affordability 2.1.1. Access 2.1.2. Affordability 3. Social policies 3.1. National level social policies 3.1.1. Weight and significance of the national compensation scheme 3.1.2. Guidelines of the compensation 3.1.3. Monitoring and abuses 3.2. Local level social policies 4. Arguments for private sector involvement – under scrutiny 5. PSP in the Hungarian water sector 5.1. General trends of private sector involvement 5.1.1. Company size 5.1.2. Efficiency/productivity 5.2. The effect of private sector involvement on water price 6. Conclusion References   4 1. Introduction After more than a decade with experimenting with PSP 1  in the water sector, we still do not have a clear picture about the privatization process in Hungary and its impact. This chapter will try to provide an in-depth analysis on some of the results achieved so far. The Hungarian water sector has gone through a major transition influencing both its economic and social performance and the democratic accountability of the system since the early 1990s. Before the 1990s drinking water provision had been the responsibility of the state. State managed companies had only very little incentives to follow the profit logic, their main goal being to get enough subsidies from the government and to meet the goals set out by the economic plans. The New Economic Mechanism introduced in 1968 was unique in the socialist region in terms of the space in provided for private incentives in the operation of the companies. However, water provision and management was the sole responsibility of the few state operated utilities. During the socialist era household water and sanitation services were free of charge 2  This was changed only after the 1990 regime change, when fees had been gradually introduced. Water and sanitation prices have been steadily increasing in real terms over the  past 15 years. However, the prices are kept arbitrary low by the local governments. The reason is that people were used to free water and therefore making them pay for the water and sanitation services is still a politically sensitive issue. The local government act (1990) transferred the responsibility of water provision to the local governments, declaring water provision as mandatory, sewage and drainage as non-mandatory tasks. In 1991 and 1992 the 33 water companies were replaced by five regional and a vast number of local companies owned by the local governments. However, municipalities had the right to refuse the transfer and in some cases it indeed happened. In some places the state ownership remained, just like in the case of the five regional companies. Thus the changes resulted in a mixed ownership structure (about 20% of the water companies are still state-owned) and a highly fragmented structure, with altogether 369 companies supplying drinking water and/or sewerage service by the end of 2001. Around half of the water companies run water services in only one town or village. The process of decentralization was also strengthened by the raise in operational costs and water prices. Those utilities that could provide water from local water-sources got decoupled from the regional companies (Somlyódy et al. 2002). A further complication in management was created by starting privatization in 1994 in the water sector at local level and the concession agreements signed for management purposes. Hungary has been leading in Central and Eastern Europe in terms of privatization of  public services: the entire energy sector and many of the waterworks have been privatized. Today about 40% of the water is distributed by private companies/joint ventures; and about 20% of the water companies are privatized. Some companies are Hungarian, but the well-known multinational companies have also been very active in Hungary: Veolia, SUEZ, RWE, E-on, and Berlinwaters, among others. The fact that different types of ownership are present in Hungary makes room for a comparative analysis. The intention of this paper is to investigate how private sector participation (PSP) in the water supply industry impacts upon the poverty-related issues of equity, access and affordability and how social policies are designed to help the poor. We investigated the 1  When we refer to “privatized water companies” we mean a partially privatized companies owning a long-term management rights. 2  This was a general policy during the socialist era: the prices of public services were kept artificially low (or they were non-existent). This was a social transfer (welfare measure) which partly compensated people for low salaries.   5national level framework, sketched up the functioning of the regulatory institutions, quantitatively analyzed the involvement of the private sector. The backbone of the study is  based on a dataset provided by the Hungarian Waterworks Association 3 . The database contains data about some 120 water and sewage companies from1995 to 2004. In our analysis we used only data from water companies, around 90 companies. In terms of the number of Hungarian water companies our database represents less than one third of the total number of waterworks, since in Hungary 369 water and sewage companies exist (state of Summer 2005). However, the database contains data about the members of the Hungarian Waterworks Association, which are basically the largest water companies. Therefore the companies covered by the database actually provide more than 90% of the water produced in Hungary, serving about 9.5 million people (total Hungarian population is 10.2 million people). A great number of the Hungarian waterworks are extremely small village waterworks, and many of them are not members of the Association. The structure of the paper is as follows. First, we provide a general description about the Hungarian water sector, including data about access to, and affordability of, water. Second, we provide a presentation of the Hungarian social policies concerning water. Third, we present an outline about the trends of water privatization in Hungary. Here we include the results of data analysis on private sector involvement and water price. 2. Characteristics of the Hungarian water sector 2.1. The meaning of access and affordability 2.1.1. Access Access to water in Hungary is not a problem by international standards. The World Health Organization requires that people have access to safe drinking water within the reach of 200 meters from their home. Hungary meets this requirement. Piped water is available to almost all of the settlements (99.7% of the settlements), and where it is not, or quality problems impede water consumption, water is transported. Public fountains free of charge are provided in towns and villages. Water provision is a compulsory task for local governments. The  provision of public services is basically defined as part of the tasks of local municipalities by the Act on local municipalities and other laws. The fact that piped water is available in almost every settlement suggests that if people are not connected to the pipeline, it is not because of physical, but financial constraints. Indeed, important inequalities still exist in terms of connectedness, as the data of Table 1  below clearly show. Even by now only 81% of the poorest families have tap water in their house, and this ratio was only 75.5% in 1992. Almost all of the families of the richest income groups have piped water in their home, although data are striking in showing that piped water coverage is not 100% even for these groups. 3  The database was provided by the Hungarian Waterworks Association (Magyar Vízközmű Szövetség). We would like to thank the Association, and in particular dr. Mária Papp, the President of the Association for the help given to our project.
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