Municipal water supply of Ukraine: analysis of present state and prospects of public-private partnership

V.V. Stasiuk,

аспирант кафедры экономической теории и международной экономики, Луцкий национальный технический университет (43018, Украина, г. Луцк, ул. Львовская, 75; e-mail: stasjuk_lutsk@ukr.net; victorypost@mail.ru)

Аннотация. В статье выполнен анализ технического и экономического состояния коммунального водоснабжения Украины. В качестве наиболее альтернативного варианта его оздоровления рассматривается интенсивное сотрудничество с приватным сектором (в рамках государственно-частного партнерства) и международными финансовыми организациями. Автором рассматриваются контракты на оказание услуг (выполнение работ) и контракты на управление как наиболее рациональные формы государственно-частного партнерства в коммунальном водоснабжении Украины, способные хотя бы частично улучшить его состояние в условиях политической и экономической нестабильности в государстве.

Abstract. This article deals with analysis of the technical and economic state of municipal water supply in Ukraine. Intensive cooperation with private sector (public-private partnership) and international financial institutions is considered to be the most alternative way of its improvement. The author examines the contracts for providing services (works) and the management contracts as the most rational forms of public-private partnerships in the municipal water supply of Ukraine, capable of at least partial improvement of its state in the conditions of political and economic instability in the country.

Ключевые слова: коммунальное водоснабжение, государственно-частное партнерство, контракты.

Keywords: municipal water supply, public-private partnership, contracts.

A great amount of scientific publications have been devoted to the research of housing and municipal services (HMS) condition in Ukraine. The need for its urgent reform has been proved, including the implementation of public-private partnership (PPP) mechanisms. However, the findings and recommendations are mostly generic in nature and relate to the entire housing sector, but not to its individual sectors. Specific results of research and clear recommendations concerning the forms of cooperation with the private sector in the framework of PPP, in particular, for municipal water supply, as a major component of HMS of Ukraine have been failed to detect. Therefore the aim of the work is the analysis of the state of municipal water supply in Ukraine and the choice of PPP forms, which can be actually implemented in this sector.

Municipal water supply in Ukraine is in serious technical and economic condition today. Due to the significant deterioration of water supply systems built in the middle of the previous century (37.8% or 67817.7 km at the end of 2012 [4]), a number of accidents on them, accompanied by a significant loss of drinking water, has been increasing each year. The greatest proportion of water networks, which are in poor condition (of the total length), is peculiar to Lugansk - 62.4%, Donetsk - 49.7%, Lviv - 44.6% and Dnepropetrovsk - 42.4% regions, and also to Crimea - 52.3% and Sevastopol - 55.7% [4].

"The National Report on the quality of drinking water and the state of drinking water supply in Ukraine in 2012" [3] states that in 2012 the country used 9678 million m3 of fresh water, including drinking water - 2153 million m3, and technical water - 7525 million m3. While 408.8 million m3 of drinking water was used for industrial purposes, 166.1 million m3 of which was taken from municipal water supply systems [3]. The amount of water loss - 2286 million m3 is alarming, it has increased by 50 million m3 compared with 2011. These losses amounted to 16% of the total volume of water raised by pumping stations. At the same time the leader in these losses is HMS - over 51 % of the total water loss [3].

These figures clearly confirm the critical condition of municipal water networks. In addition, much of the equipment for water lifting, its purification, transportation, distribution is also in urgent need of restoration and often of complete replacement. "The National Report on the state of natural and technogenic safety in Ukraine in 2012" [4] states, that at the end of 2012 20% of the water pumping stations have exhausted their standard, 40 % of pump units require urgent replacement, and 25% of water purification units are in urgent need for refurbishment. The report stresses that the country has not provided persistent water supply for the urban population, and only in Kharkov and Volyn regions, as well as in Kiev, the index is 100% [3].

Экономика и предпринимательство, № 2, 2014 г.

Almost all water utilities are unprofitable, in particular due to the discrepancy of water tariff and its expense. Economic reform program for 20102014 "Prosperous Society, Competitive Economy, Effective State" [10] provides a significant improvement in the financial condition of water utilities, in particular, by means of increasing tariffs. But the policy tagets remain unfulfilled traditionally -the analysis of the actual results of utilities' production activities during 10 months in 2013 shows that:

- the existing tariffs for piped water supply to the population (namely, it consumes more than 90% of these services) cover only 72.3% of their prime cost [1]. The level of coverage (dated 01.07. 2013) varies in a very wide range - from 49.8% in Kharkov to 94% in Zaporozhye [5];

- almost all utilities are unprofitable - losses in 2013 are within 1.9 billion hryvnia [1];

- the debd for electricity increased by 66.4% and by October 1, 2013 it was 4.05 billion hryvnia -the highest in recent years [1]. (It is characteristically, that the debts of water utilities for electricity are about 27% of total debts for it all over the country [5]).

That is why the members of the Ukrainian Association of water supply and sanitation sector "Ukrvodokanalekologiya" [5] consider especially condemnatory the fact, that in the case of the absence of tax debds and debts for electricity by water utilities the subvention from the State budget to repay the difference in tariffs are not legislatively prescribed. They summarize, that in circumstances when the state artificially constrains the growth of tariffs for water supply, and "Order and the terms of the 2013 State budget subvention to local budgets for the repayment of the difference in tariffs for heat energy, centralized water supply and sanitation, which were produced, transported and delivered to the population, arising from the non-comformity of the actual cost of heat energy and of centralized water supply and water sanitation tariffs approved and/or agreed by the state authority or local selfgovernment" (approved by the Decree of the Cabinet of Ministers of Ukraine №167 dated 20.03. 2013) are not put into practice even because of their great imperfection, such non-payments deepen significantly unprofitableness of utilities, making them entirely hopeless and unable to provide qualitive services of the centralized water supply.

Although it is worth noting, that municipal water supply is estimated in a quite realistical way at the high state level. Primarily, it is confirmed by the Presidential Decree dated June 25, 2013 №350/2013 [7], which put into practice the decision of the National Security and Defense Council (NSDC) of Ukraine concerning the security of the state water resources and the provision of high-quality drinking water to population. In this decision, the National Security Council emphasizes poor

technical condition, deterioration and lack of an extensive system of centralized water supply and sanitation, as well as water purification technology obsolescence. In this regard, the Cabinet of Ministers was instructed to create measures for significant improvement of the water supply system and drinking water sources, provision of safe drinking water in the required quantities, as well as improvement of the legislative basis. In addition, the Government was charged with ensurance of apropriate financing of these measures by providing relevant costs in the state budget for 2014 and subsequent years.

It is important that among the measures proposed by the National Security Council are the development and approval of: a) the Water Strategy of Ukraine for the period up to 2025; b) the order of concessional lending (in particular due to the State budget) for economic entities to implement their modernization projects of the centralized water supply and sanitation systems; c) national standards for drinking water.

However, the above example of nonpayment of legislatively provided subventions for water utilities make doubt the feasibility of the financial intensive activities proposed by NSDC [7]. Hence, the conclusion is that only the attraction of private investment and international financial institutions funds is able to improve the state of municipal water supply in Ukraine. The volumes of funds must be significant enough - according to the Ukrainian Association of water supply and sanitation sector "Ukrvodokanalekologiya" [1] to restore the operational reliability of water supply and sanitation the country requires 4-6 billion euros, and to achieve European quality of water services and related standards of the European Union - about 30 billion euros.

Understanding at the national level the need of urgent attraction of private sector investment and international financial institutions funds for the rehabilitation of municipal water supply sector has been reflected in a number of laws and regulations in recent years, among which are the Laws of Ukraine "On the National Target Program "Drinking Water of Ukraine" for 2011-2020" and "On the National program of reformation and development of housing and municipal services for 2009-2014", The economic reform program for 2010-2014 "Prosperous Society, Competitive Economy, Effective State", Presid

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