1963-2013 - 50 years of Research for Social Change

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Back | Programme Area: Markets, Business and Regulation (2000 - 2009) | Event: Social Policy, Regulation and Private Sector Involvement in Water Supply

Social Policy, Regulation and Private Sector Involvement in Water Supply

Social Policy, Regulation and Private Sector Water Supply : the Case of Hungary

The intention of this research project is to investigate how private sector involvement in the water supply industry impacts upon the poverty-related issues of equity, access and affordability in Hungary. The paper analyzes the way in which social and regulatory policies, in the context of private sector involvement, are intended to help the poor.

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. Formally water utilities were owned by municipalities and the state, since overall privatization of the assets was prohibited by law. However, partial privatization happened, combined with long term management rights given to private companies. 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 paper focuses on two levels of analysis: on the local level, that is, the level of cities, local governments and water utility operators; and the national level, where laws governing the water sector are formed, and where data is available for water spending in the different income segments. We investigate the national level framework, briefly sketch up the functioning of the regulatory institutions, quantitatively analyze the involvement of the private sector, and provide several case studies elaborating the process of the privatization highlighting in-depth the conflicts and the performance of the utilities.

The backbone of the study is based on a dataset provided by the Hungarian Waterworks Association. The database contains data about some 120 water and sewage companies, which provide about 90% of the water produced in Hungary and serve about 9.5 million people.

The database allowed us to draw a detailed picture about water companies, and describe the peculiarities of privatized waterworks. The most important question that we wanted to answer concerned the relationship between company ownership and water prices. Do privatized companies set higher water prices than the community-owned waterworks? If so, we can establish a relationship between water privatization and poverty. Our hypothesis was that private companies do have higher water prices.

The main findings of the study are the following:
- There is a lack of state capacity to control and monitor water privatization. Privatizations happen at the local (municipal) level, and there is no central authority (Office of Water) which would control, monitor the process. The National Water Authority deals only with environmental, water management and technical issues. However, local governments do not necessary have the capabilities to regulate the private operators. Water privatization started in Hungary without the proper institutional and legal framework and led to several local conflicts.

- There are strong, but distorted social policies and a need for better targeting them.
Water price is heavily subsidized now in Hungary:
  • First, cross-subsidization happens: household water prices are lower than industrial prices.
  • Secondly, for political reasons water prices are kept low by local governments, which is in fact a hidden subsidy. Water tariffs hardly cover the operation costs. We are far from full-cost recovery.
  • Thirdly, central subsidies also help to keep prices below a threshold: the central government covers a non-negligeable part of the water costs from the state budget.
- Private sector involvement in the Hungarian water sector has not led to price increase. Privatized companies do not have higher water prices than the community-owned waterworks. Therefore they do not affect the poor’s water affordability. This is a surprising result, which runs contrary to our initial hypothesis, the popular wisdom and many other real-life examples from different countries. We formulated three explanations for this (none of them is exclusive): the peculiarities of the regulatory environment which does not allow the price to increase and therefore put other incentives for the private operators (fixed management fees or fees linked to costs cut, etc.); the efficiency improvements made by the private operators (which allows them to obtain gains without necessary increasing the prices); and the “cherry-picking” of private investors (choosing those companies where efficiency gains could be easily obtained and prices are ab ovo not high).

- Unclear/ambiguous results of water privatization. Private water companies (especially multinational corporations) have been able to increase their efficiency (productivity). However, this has not led to falling prices. Private companies have not contributed to investments, and we have no data about the quality of the service they offer. We would need further research and more detailed data about:
  • the exact valorization of gains in efficiency;
  • evaluation of the loss and gains in investments;
  • the impact of job cuts;
  • the evaluation of the loss of local expertise - and possible gains in management skills and technical knowledge;
  • clear quality benchmarks for water production and provision (including environmental quality, water quality and quality of the service)
in order to have a complete picture about the social effects of water privatization.