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Hungary: Social Policies and Private Sector Participation in Water Supply


Abstract and Figures

After more than a decade of experimentation with private sector participation (PSP)1 in the water sector, we still have no clear picture about the privatization process in Hungary and its impact. This chapter will try to provide an analysis of the impact of PSP in the water sector in Hungary. The Hungarian water sector has undergone a major transition since the early 1990s, which has affected both its economic and its social performance. Before the 1990s, under the centrally planned economy, drinking water was provided by the state. As a result, state-managed companies had almost no incentive to increase efficiency. Their main goals were to obtain enough subsidies from the government and to try to meet the goals set out in the economic plans.
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall
After more than a decade of experimentation with private sector partici-
pation (PSP)1in the water sector, we still have no clear picture about
the privatization process in Hungary and its impact. This chapter will
try to provide an analysis of the impact of PSP in the water sector in
Hungary. The Hungarian water sector has undergone a major transition
since the early 1990s, which has affected both its economic and its social
performance. Before the 1990s, under the centrally planned economy,
drinking water was provided by the state. As a result, state-managed
companies had almost no incentive to increase efficiency. Their main
goals were to obtain enough subsidies from the government and to try
to meet the goals set out in the economic plans.
During the socialist era household water and sanitation services were
provided free of charge.2This ended only after the 1990 regime change,
when user tariffs were introduced gradually. Although the tariff of water
and sanitation have been steadily increasing in real terms over the past
15 years, these prices are kept low by local governments. The reason is
that people were used to free water during the socialist era and making
them pay high prices would be politically sensitive.
The local government act (1990) transferred the responsibility for
water provision to local governments, declaring water provision to be
mandatory. In 1991–1992 the 33 water companies were replaced by five
regional companies. However, many local companies remained under
the control of local governments. However, municipalities had the right
to refuse the transfer and in some cases this is what happened. Thus, the
changes resulted in a mixed ownership structure (about 20 per cent of the
water companies are still state-owned) and a highly fragmented structure,
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 179
with altogether 369 companies supplying drinking water and/or sewer-
age service by the end of 2001. Around half of the water companies
run water services in only one town or village. The process of decen-
tralization was also strengthened by the rise in operational costs and
water prices. Those utilities that could provide water from local water
sources were decoupled from the regional companies (Somlyódy et al.
2002). When the privatization of water services at the local level started
in 1994 through concessions or management contracts, things became
even more complex.
For the Central and Eastern Europe region, Hungary has been a pioneer
in the privatization of public services (the entire energy sector and many
of the water distribution services). Today about 40 per cent of the water
is distributed by private companies/joint ventures, and about 20 per cent
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
it suitable for a comparative analysis.
The intention of this chapter is to investigate the impact of PSP in the
water supply industry on access and affordability of the poorest house-
holds, and how social policies are designed to help the poor. The study is
based on a dataset provided by the Hungarian Waterworks Association.3
This database contains data on 120 water and sewage companies from
1995 to 2004. In terms of the number of Hungarian water companies
our database represents less than one-third of the total number of water-
works of a total of 369 water and sewage companies (in 2005). However,
the database contains data on the members of the Hungarian Water-
works Association, which are essentially the largest water companies.
Therefore the companies covered by the database actually provide more
than 90 per cent of the water produced in Hungary, serving about 9.5
million people (of a total Hungarian population of around 10.2 million
people). A great number of the Hungarian waterworks are extremely
small village networks, and many of them are not members of the
The structure of the chapter is as follows. First, we provide a gen-
eral description about the Hungarian water sector, including data about
access to and affordability of water. Secondly, 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 prices. In the final section we draw some policy conclusions.
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180 Social Policies and PSP in Water Supply
Characteristics of the Hungarian water sector
The meaning of access and affordability
Access to water in Hungary is not a major problem in comparison with
other developing countries, such as those in Africa or South Asia. Accord-
ing to the World Health Organization (WHO), access to water is defined
as having a source of safe drinking water within 200 metres of one’s
home. In Hungary, piped water is available to almost all (99.7 per cent)
of the settlements. In places where it is not feasible to provide piped net-
works, water is transported in tanks. Free public fountains are provided
in towns and villages. As mentioned earlier, water provision is a local
government obligation.
The fact that piped water is available in almost every settlement
suggests that if people are not connected to the pipe network, it is
for physical, rather than financial constraints. As Table 7.1 illustrates,
although the national average figure shows that 96 per cent of the
Table 7.1 Proportion of dwellings supplied with piped water by income groups
(per cent) and the change between 1992 and 2003 (percentage)
Year Income groups
1 2 3 4 5 6 7 8 9 10 Average
1992 75.5 82.3 86.1 88.0 89.7 90.7 93.2 93.6 96.8 97.6 89.3
1993 73.4 82.8 85.9 88.2 88.7 89.7 92.9 95.5 96.6 98.3 90.2
1994 79.0 85.3 86.6 88.9 91.0 89.9 92.2 94.4 96.6 98.3 91.0
1995 75.8 84.9 86.8 87.0 89.8 93.0 93.3 93.9 97.3 97.9 91.0
1996 76.4 86.5 90.3 91.5 90.6 91.7 93.7 95.6 96.8 98.1 92.1
1997 73.3 86.1 90.5 90.1 90.7 91.4 92.5 95.9 97.7 98.7 91.8
1998 79.1 87.5 90.3 89.8 91.9 93.9 94.1 94.7 96.7 98.6 92.6
1999 77.6 85.9 89.2 90.7 92.6 93.7 94.1 96.6 97.3 98.9 92.8
1st 1st 2nd 3rd 4th 5th 10th Average
decile quintile quintile quintile quintile quintile decile
2000 80.7 85.7 92.0 93.9 97.2 99.0 99.4 94.4
2001 77.8 84.2 93.8 95.9 98.0 99.4 99.4 95.1
1 2 3 4 5 6 7 8 9 10 Average
2002 79.1 90.8 92.5 94.5 95.5 96.8 97.0 98.5 98.5 99.3 95.2
2003 80.7 91.0 92.7 95.8 95.2 96.7 97.3 98.6 98.5 99.4 95.5
Source: Hungarian Central Statistical Office.
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 181
population is connected to piped water in their homes, it is very uneven
in terms of income group. In 2003, only 81 per cent of the poorest
families had piped water in their homes. This situation was a slightly
improvement on the figure in 1992, when it stood at 76 per cent. There is
almost universal access to piped water connection for the richest income
groups in their residences.
Why do the poorest groups have no access to piped water in their
homes? We could eventually redefine the question of access to piped
water as an affordability question. In other words, although there is
a piped network running in their settlement, the poor may be unable
to pay for the necessary connections. It is not the physical and spatial
marginalization of social groups (or regions) that creates inequalities in
terms of access in the first place. It is more to do with the limited financial
capacities of people to pay for the costs of connection. In other words,
connection charges hamper access and not necessarily the consumption
The hypothesis that the question of access is indeed a question of
affordability is also reinforced by the data. Although the data on access
show a slow, gradual increase for each income group over time, this
rate of growth rose slightly after 2000. And 2000 was the first year after
1995 when overall household expenditures grew in real terms. This is
also the year when water consumption started to increase, following
seven years of decline. This suggests that connections may be determined
by the relative income positions of households. If people have higher
financial status, then they are willing to spend this on water connection
and related infrastructure (bathroom, or non-essential uses).
As one would expect, inequalities also exist in regional terms and by
type of settlements. Table 7.2 shows that rural areas considerably lag
Table 7.2 Rate of residence supplied with piped water by
settlement type (percentage)
1992 1995 1998 2000
Rate of residence 89 91 92 94
connected to public
water supply
Budapest 98 98 99
Other towns 90 92 9493
Rural areas 73 82 87 87
Source: Hungarian Central Statistical Office.
Note:With Budapest.
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182 Social Policies and PSP in Water Supply
behind urban areas. Tables 7.1 and 7.2 show that most poor people
in Hungary live in rural areas. In Hungary, the distribution of house-
hold income shows a strong correlation with the population size of the
We use household expenditure data provided by the Central Statistical
Office to assess the amount a household spends on water. As illustrated
in Table 7.3, the amount spent on water grew between 1992 and 1995
for all income groups. During this period there was an economic reces-
sion in Hungary, with GDP dropping by about 15 per cent. Revenues
were shrinking even more rapidly. Household expenditures for the first
income group dropped in nominal terms by 13 per cent from 1992 to
1993. However, after 1995 we can distinguish three trends in spending
on water.
The first five income groups saw their water spending stabiliz-
ing around 1.4–1.5 per cent of household expenditure between 1995
Table 7.3 Affordability of water: water bills (without sewerage charges) according
to income groups for Hungary (percentage of yearly household expenditure)
Year Income groups
1992 1.1 1.2 1.1 1.1 1.1 1.0 0.9 0.9 0.9 0.8
1993 1.2 1.2 1.3 1.2 1.3 1.2 1.3 1.2 1.0 0.8
1994 1.2 1.3 1.3 1.2 1.2 1.3 1.2 1.1 1.0 0.8
1995 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.3 1.1 0.9
1996 1.4 1.5 1.5 1.4 1.4 1.3 1.4 1.2 1.2 0.9
1997 1.4 1.6 1.5 1.4 1.4 1.4 1.4 1.4 1.2 0.9
1998 1.4 1.4 1.3 1.4 1.4 1.3 1.2 1.3 1.1 0.9
1999 1.5 1.5 1.4 1.5 1.4 1.5 1.3 1.2 1.2 0.9
1st 1st 2nd 3rd 4th 5th 10th
decile quintile quintile quintile quintile quintile decile
2000 1.5 1.5 1.5 1.5 1.3 1.0 0.9
2001 1.4 1.4 1.4 1.3 1.2 0.9 0.8
2002 1.5 1.5 1.4 1.3 1.2 0.9 0.8
2003 1.5 1.5 1.5 1.4 1.4 1.3 1.3 1.2 1.1 0.8
Source: Hungarian Central Statistical Office.
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 183
and 2003. This means a 36 per cent increase in water expenditure as
a percentage of overall household expenditure for income groups one
and three, and an increase of about 26 per cent for income groups two,
four and five for the whole period. Income groups six to nine experi-
enced a slow decrease of water spending in their household expenditures
from 1995 to 2003. Water spending from household expenditures peaked
around 1996–97 and after it has been slowly decreasing. For the whole
period this means an increase in spending of around 30 per cent (groups
six and eight), 44 per cent (group seven) and 22 per cent (group nine).
The members of the richest income group have been spending almost
the same on water throughout the whole period. In 2003 they devoted
0.8 per cent of their expenditures on water – the same percentage as
in 1992.
We can say that these figures are not high enough to cause a burden on
households. It is difficult to decide what is the benchmark. For example,
Fitch and Price (2002) propose a threshold of 3 per cent of income spent
on water services (water and sanitation together) as a definition of water
poverty. This threshold has been widely used since. Internationally, it is
accepted that water bills should not be more than 3–5 per cent of total
Table 7.4 refers to expenditure data instead of income. The combined
water and sewerage expenditures do not reach 3 per cent, even in the
case of the poorest income groups. This implies that water affordability
does not seem to be a problem in Hungary. As shown in Figure 7.1,
however, water consumption data may indicate that people were feeling
the burden of increasing water prices. As water prices increased sharply
in real terms during the 1990s, water consumption decreased, standing
at 87 per cent of the 1995 consumption level at the end of the 1990s.
This is a considerable fall in water consumption.
The picture is just a little bit different for the poorest income group
(Figure 7.2). Water consumption dropped for the poorest between 1995
and 1999. This drop was even more pronounced than for the whole
population (to 80 per cent of the 1995 level – compared to 87 per cent).
However, with stabilizing water prices and rising household expenditures
water consumption began to increase again, and by 2003 it had reached
the same level as for the whole population (94 per cent of the 1995 level),
despite the fact that income growth has been more modest than for the
whole population.
Water consumption shows significant variations over time. This is per-
haps a surprising finding since water is considered to be a basic necessity
and therefore has a low price elasticity. One explanation would be that
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184 Social Policies and PSP in Water Supply
Table 7.4 Affordability of water: water bills and sewerage charges according to
income groups for Hungary (percentage of yearly household expenditure)
Year Income Groups
1995 1.98 1.94 1.87 1.84 1.79 1.96 1.81 1.77 1.56 1.30
1996 1.87 2.03 2.05 1.83 1.96 1.96 1.97 1.74 1.68 1.36
1997 1.81 2.15 2.05 1.88 1.93 1.94 1.92 1.99 1.79 1.40
1998 2.05 1.90 1.87 1.87 1.89 1.84 1.83 1.96 1.71 1.43
1999 2.10 2.20 1.96 2.16 2.01 2.14 2.04 1.90 1.94 1.44
1st 1st 2nd 3rd 4th 5th 10th
decile quintile quintile quintile quintile quintile decile
2000 2.29 2.30 2.39 2.37 2.22 1.80 1.64
2001 2.22 2.15 2.20 2.23 2.04 1.60 1.45
2002 2.01 1.95 2.29 2.24 2.13 2.17 1.53
2003 2.47 2.63 2.62 2.53 2.45 2.38 2.42 2.21 2.07 1.72
Source: Hungarian Central Statistical Office.
(1995 100) %
Water price
Water consumption
Figure 7.1 Average household expenditures, average water price increase and
household water consumption (percentage change in real terms, 1995 =100)
rich people tried to reduce their consumption on non-essential items
such as swimming pools or gardens whereas there is very little scope for
the poor to decrease water consumption. As can be seen from Figure 7.2,
water consumption has changed considerably, following the variations
of water price and to some extent, income.
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 185
(1995 = 100) %
Water price
Water consumption
Figure 7.2 Household expenditures of the 1st income decile, average water price
increase and household water consumption (percentage change in real terms,
1995 =100)
Did PSP in the Hungarian water industry impact on the increases
in water prices observed over the past decade? Has private sector
involvement contributed to rising water bills in Hungary? Even if water
poverty does not seem to exist, people may be considered as water-poor,
since water prices vary by a factor of three from one locality to another.
We do not have local water expenditure data, but considering at water
prices and their relation to PSP in water can provide some illumination
as to whether or not water privatization has any effect (either positive or
negative) on water affordability.
The reason is that water affordability, as measured in terms of water
expenditures per total income (or expenditures), is a composite indica-
tor, which depends upon water price, water consumption, and income.
Income itself may be affected by social policies. Therefore using water
expenditures per total income as an measure of affordability may obscure
the effects of privatization on price. Increasing prices caused by privatiza-
tion may be counterbalanced by falling consumption, increasing income
or social policy measures.
Social policies
National-level social policies
In order to comply with the European Union Water Framework Directive,
the Hungarian water tariff compensation scheme has to be transformed
no later than 2015. Among other things, this directive ensures that
the prices charged to the consumers reflect the true price of abstrac-
tion, distribution and treatment – that is, the cost recovery principle.
As mentioned earlier, in Hungary the price does not reflect the true cost
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186 Social Policies and PSP in Water Supply
Table 7.5 Water prices and compensation, HUF/cubic metre, 1993–99 (EUR1 =
1993 1994 1995 1996 1997 1998 1999
Producer price minimum 19 25 44 32 34 49 30
Producer price maximum 79 362 1,472 1,565 1,874 2,033 2,176
Household price minimum 21 27 50 36 38 55 34
Household price maximum 52 66 87 114 146 182 207
Compensation minimum 0 0 00000
Compensation maximum 32 302 1,394 1,537 1,696 1,871 1,991
Compensation ratio 41 83 95 98 91 92 92
(with maximum prices) (%)
Source: Hajós (2000: 43), and own calculations.
and is based on a subsidy scheme. The amount of subsidy is decided
yearly within the national budget. This sum is distributed among those
water companies, of which the costs of water production (and there-
fore the water prices) exceed a given threshold. Companies receiving the
compensation can lower their water prices to the threshold level. The
threshold changes yearly, being the function of the sum to be distributed.
Since this sum has decreased constantly in real terms, the threshold of
subsidy has increased constantly over the past ten years. The subsidy is
able to reduce the price of water in those few localities where (for either
geographical or technical reasons) the costs of water provision are very
high. There is a tenfold difference between the water utilities with the
lowest and the highest costs of water production (see below).
There is certainly a justification for state intervention in tariffs. Our
study shows the importance of state and local government intervention
in keeping the prices at an acceptable level (taking into account that
water was free in the socialist era). Although the affordability data shows
that water tariffs are not a problem, we should bear in mind that the
costs of water provision vary to a considerable extent.
Weight and significance of the national compensation scheme
Without state intervention, water prices in some regions would be very
high. Table 7.5 shows the amount of water compensation between 1993
and 1999 per cubic metre of water. We can see that water prices are
widely dispersed, ranging from HUF30 to HUF2176 per cubic metre in
1999 (EUR1 =HUF250). In the case of the highest producer prices central
government subsidies cover the majority of the price, reaching above 90
per cent from 1995. The amount of compensation decreased after 1995
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 187
Table 7.6 Household water-services compensation (billion HUF; EUR1 =
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
By year 1.5 1.5 1.5 2.0 2.5 3.0 3.4 3.8 4.1 4.5 4.9 5.6 5.9 5.5
At 2002 6.5 5.3 4.5 4.6 4.7 4.8 4.7 4.8 4.7 4.7 4.9
Source: Koskovics and Rákosi (2002) and budget acts.
and 1996, as a result of the steep rise in the absolute value of compensa-
tion transferred to local governments (increase in production costs and
inflation). This shows that the central budget subsidies could not keep
abreast with the rise of producer prices.
By looking at the absolute figures of central government household
water compensation (Table 7.6), we can see that it had been increasing
constantly from 1995 onwards (HUF1.5 to HUF2.0 billion) until recently,
with only HUF0.4 billion drop in 2005 at nominal value. Calculated at
2002 base value we can see that the subsidy has fallen significantly in
the first years, and oscillated around HUF4.8 billion during the following
years. With a tight budget in 2005, the government had to cut spend-
ing. Water subsidy was reduced, offsetting the real increase of the first
years of the 2000s. The amount spent on water compensation represents
only a marginal part of the government budget (0.0422 per cent). The
total value of household water consumption calculated at average min-
imum price for the year 2003 was HUF63.625 billion4(EUR1 =HUF250).
Accordingly, state subsidy in 2003 corresponds to 8.8 per cent of the
total household water consumption. This does not seem to be a huge
amount. However, we should not forget that this subsidy is somehow
intended to those operators where the production costs are excessively
high. Together with local authorities’ right to set the prices, this ‘small’
amount of central subsidy plays an important role in securing the basic
rights and welfare of citizens.
In 2002, 12 out of 80 water companies in our database (15 per cent
of the companies) received central budget subsidies, among them three
privatized operators (one multinational company and two small, local
We could argue that keeping household water prices very low by
excluding some cost elements from the calculation is considered a
hidden social policy. For example, Ungvári and Mohai (2004) argue
that prices are usually set very low, which excludes investment and
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188 Social Policies and PSP in Water Supply
depreciation costs. Prices are not even able to cover the operational costs.
In most cases, utilities are not responsible for investments, since it is
the municipality’s responsibility with subsidies from central government
and some EU funding (Koskovics and Rákosi 2002). Upon agreement (as
in the case of Budapest) a so-called ‘improvement ratio’ may be added to
the price to cover part of the investment costs, but this is very rare. By
keeping prices low, the fairness of this policy tool is questionable, as it
diverts flows towards the well-off5.
In 2002 the threshold to which the central budget supported
household water services was HUF240/cubic metre, and in the case of
combined water and wastewater services it was HUF434/cubic metre.
With the increase in operational costs and the amount requested from
the central budget a ceiling had to be introduced – this stood at 95.4
per cent in 2002. This means that local governments received a maxi-
mum of 95.4 per cent of the difference in costs of the threshold value.
As Koskovics and Rákosi (2002: 53) point out, the threshold value had
been increasing faster than inflation, that is the real value of the highest
household water tariffs also increased significantly, with approximately
20 per cent from 1997 to 1999.
Guidelines of the compensation
As mentioned, the overall amount available for household water com-
pensation is set annually in the national budget. In 1993, this was
decided at an interministerial (interdepartmental) level. The central sub-
sidy has to flow through the local government and cannot be transferred
directly to the operator. The guidelines for considering individual appli-
cations are not defined in the budget acts: they are left to the ministry
responsible for water issues. The ministry (or the interdepartmental com-
mittee) either issues a communication or, as has been the recent practice,
a ministerial decree.
This practice has been criticized by the State Audit Office. Local gov-
ernments have to report yearly about the subsidies. If they do not do
so, the whole subsidy has to be transferred to the government. Ini-
tially, due to the frequent changes in the organizational structure of the
water sector, the interdepartmental committee could not define stand-
ard universal principles; rather, it allocated the disposable sum based on
individual deliberations. As the report of the State Audit Office (1996)
points out, several local governments misused central budget subsidies
by manipulating water prices and using the funds for other purposes.
For example, the guidelines of the application procedure for the 2005
compensation were set in a ministerial decree that stated the following
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 189
among others: Those local governments may receive central budget
drinking water price compensation that fulfills the following criteria:
in the case of regions with sewerage services 60 per cent of the network
is connected to the sewerage system;
specific costs of drinking water service exceed HUF175/cubic metre in
the case of water bought from another water utility;
specific costs of drinking water service exceed HUF319/cubic metre in
the case of regions without sewerage;
specific costs of combined drinking water and sewerage services
exceed HUF601/cubic metre in the case of regions with sewerage
The interdepartmental committee decides on the extent of individual
compensations based on the following principles:
depreciation does not exceed HUF200/cubic metre;
the year-on-year rise in salaries does not exceed 6.5 per cent;
the year-on-year rise in material-type costs does not exceed 2 per cent;
the year-on-year rise in overall specific costs does not exceed
8 per cent;
if the price-setting agency sets a different price for non-residential
water consumption, this price must not be lower than the residential
water price;
in case of water bought from another water utility, water loss does not
exceed 20 per cent.
Monitoring and abuses
The main tool to monitor and evaluate the use and efficiency of the water
price subsidies is to compare actual water tariffs and producer prices. In
terms of the impact of this national-level policy we can assume that it
tries to ease the water services bills of households. This scheme could
be criticized since it benefits the richer population more than the poor,
since the upper and middle classes consume more water.
Local-level social policies
With no reliable data, we can provide only a general description of local-
level social policies. We argue that the central government subsidy in
pricing is quite significant, compared to the limited scope for social
policies at the local level.
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190 Social Policies and PSP in Water Supply
Local-level social support for water payments is provided in the general
household maintenance supports: expenses on heating, house rental,
fuel, electricity, gas, water, wastewater and waste collection. These
charges are calculated together as household maintenance expenses. If
these charges exceed a given amount, support can be given by reducing
the bills. The local government transfers the money to the utility. The
social support is usually operated by the social and health committee of
local governments. An interesting example is that of Budapest where an
additional Foundation was set up which receives funding from the water
utility and provides assistance to the most vulnerable groups through an
application-compensation scheme.
The local governments have a high degree of freedom to make deci-
sions about social support schemes. The support they allocate varies from
one municipality to another, and also from year to year, according to the
financial situation of the individual local governments.
Based on our interviews with local government representatives, we
conclude that this form of social support is much less important than
the national-level tariff compensation, and especially the hidden sup-
port based on artificially low water prices. The main reason for this is
that local governments have insufficient funds to support local social
policies. Nevertheless, the scheme is important, because it impacts upon
the poorest people.
To conclude, we have shown that the central government compensates
for around 8–9 per cent of spending on water, in addition to keeping
water prices 5–90 per cent lower than full-cost recovery (depending on
the locality). We also demonstrated that there is some assistance provided
at the local level.
Debates on privatization – under scrutiny
Here we pay some brief attention to the political debates surround-
ing water privatization within the Hungarian context (this may also be
relevant to the situation in other transition economies). Privatization,
including water privatization in Hungary, is introduced within the con-
text of ‘general’ privatization and the transition to a market economy,
which implies the selling off of state property. Generally, there is no
specific sectoral debate regarding water utility privatization per se.
Privatization took place in an era of general political and economic
transformation, and privatization itself was one important element in
this transformation. The importance attached to privatization is under-
standable given the specificity of the centrally planned economies where
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 191
almost all productive assets were in the possession – or under the tight
control – of the state.
Privatization in the transition economies is unique in many respects,
not ‘just’ because of the political importance assigned to it. The quantity
of assets that changed ownership is very large and has touched upon
almost every sector of the economy. The speed of the process, espe-
cially in those countries leading the reforms, such as Hungary, has also
been unprecedented. The privatization process is also unique because
it has happened in a dynamically changing environment. In Western
Europe, for example, privatization is somehow defined by the existing
legal, political, cultural and economic structures. But in the transition
economies, the general regulatory or political framework has not yet
been clearly defined.
Among the arguments leading to privatization were to increase the
efficiency of public utilities, to increase government revenue, and to
increase investment. These arguments are well researched and there is
no need to go into detail here (Prasad in this volume). However, there
are some specific points to be made within the context of Hungary.
In order to increase efficiency, employment in the public sector was
reduced dramatically. For example, the activity rate among people
between the ages of 15 and 75 – that is, the rate of those adults who are
working – is some 10 per cent lower in Hungary, than the EU average.
In the water sector, Debrecen Waterworks halved its workforce within
ten years. Regarding increasing government budget, it is argued that
the Budapest Waterworks was (partially) privatized to secure revenue
since it was already restructured, and there was no substantial need to
Regarding the argument of seeking additional investment we show
that, the Szeged Waterworks (as a private company), for example, has
not been more efficient in securing additional funds compared to local
governments (who can seek cheaper loans to finance investments with-
out serious price increases). In the case of Budapest Sewage Works, the
most important investments were financed either by central government
or by the city’s budget. Another example comes from the city of Pécs with
its partially privatized waterworks (1997 SUEZ). The local authorities are
having difficulties since prices are increasing while no investments have
been forthcoming. In addition, since the waterworks is partly privatized,
the city is having difficulties securing EU funds for water infrastructure
We have shown that water privatization took place within the gen-
eral wave of privatization and that no specific debate on water took
9780230_520820_08_cha07.tex 27/11/2007 15: 52 Page 192
192 Social Policies and PSP in Water Supply
place. However, a referendum in 2004 managed to block the privat-
ization of health care services. There is a growing feeling in Hungary
that government should operate basic services.
PSP in the Hungarian water sector
General trends of private sector involvement
As already mentioned, following the change in the political regime the
ownership structure of the water system changed considerably. Cur-
rently, the ownership structure is not just fragmented, but it is also
blurred: in some regions the state ownership remained, while the major-
ity of the waterworks are owned and managed by the local municipalities.
A further complication in management was created by introducing the
privatization of water at the local level. The city of Szeged was the first
to start negotiating a concession in 1994 and several other cities and
regions followed. Now it is estimated that around 30 per cent of the
water is distributed by private companies/joint ventures (Owen 2006).
We do not have a clear picture of the privatization process of the
water sector for several reasons – the research behind the present study
is the first systematic attempt to construct just such a general picture.
One reason is that there is no Office of Water which would monitor
the privatization process. The water authority deals only with techni-
cal, environmental and quality issues related to water management –
the economic-financial aspects are not monitored. Local governments
have a high degree of autonomy to make decisions without having either
the expertise or the relevant information.6Another reason for not having
a clear picture about the state of privatization in the Hungarian water sec-
tor is that even those companies which were not privatized were formally
transformed into public corporations or limited liability companies, and
the local government became the owner.
Looking at the brief Hungarian history of PSP we can see some major
commonalities, but also some differences between the different privat-
ization cases. Most importantly, full privatization, that is, the complete
acquisition of state, local government assets by private companies, is
illegal. Hungarian local governments may choose from the following
options: outsourcing, long-term concessions and management contracts
or setting up a joint company. All of these forms occur in Hungary with
a special preference towards joint ventures and management contracts.
Since local governments cannot sell all of the assets (as in the case of
Szeged, Budapest, Pécs and several other cities), local authorities have
opted mostly for partial privatization – in other words, only a minority
9780230_520820_08_cha07.tex 27/11/2007 15: 52 Page 193
Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 193
(less than 50 per cent) stake of the company is transferred to the pri-
vate sector. This gives the municipality control, potentially giving them
power to protect the public. However, this is often offset by the privatiza-
tion agreement, which gives management rights to its private partners,
thus limiting the authority of the municipality. The minority owners –
typically a multinational company or a consortium of companies – are
granted the management rights for a long-term concession contract for
15 or (as in the case of Budapest) 25 years.
The privatization contracts – or at least some parts of them – are kept
secret. We have made attempts to obtain enough information on the con-
tent of these contracts. In most of the contracts, there is no obligation
for investment – the owners only have to maintain the infrastructure
(Juras and Schenk 2005). For example, the city of Pécs expressed its
discontent (over the fact that no additional investments were required,
but water prices were increasing) by threatening to withdraw from the
contract.7This is even more alarming since water prices do not reflect
the cost-recovery principle.
Company size
We identified 12 privatized companies in our company database, which
make up between 13 and 20 per cent of the sample. This is below the
estimated rate of privatized waterworks, which is around 30 per cent
(Ungvári and Mohai 2004). Of these 12 privatized companies, we dif-
ferentiated the multinationals (six companies) out of which five operate
in cities (Budapest, Pécs, Szeged, Kaposvár, Hódmezövásárhely) and one
is a regional company. The rest of the privatized companies consist of
a small number of Hungarian firms which manage the waterworks for
villages or small towns.
Measured in terms of the number of employees there is no signifi-
cant difference, on average, between the sizes of community-owned and
private companies. In terms of the average number of employees, the
multinationals are larger companies, while the other privatized ones are
small firms. The difference is even more accentuated if we consider the
value of company assets. The value of the assets of multinationals is four
or five times bigger than the average, while the other private companies
are much below the average.
However, this picture can be misleading. When considering at com-
pany assets one key problem is that capital account balances of water
companies are extremely unreliable (Ungvári and Mohai 2004: 29). The
average length of the water pipeline per person served would be a more
appropriate measure. Multinational companies have the lowest figures,
9780230_520820_08_cha07.tex 27/11/2007 15: 52 Page 194
194 Social Policies and PSP in Water Supply
because they operate in cities, while many other publicly owned and
operated large companies are regional water utilities. Another feature of
the privately operated water companies is that they have grown faster
than the community-owned firms. This is illustrated by the rate of
increase of the average length of water pipeline operated by a company.
We find that the pipeline systems of multinationals have grown by 15
per cent. This increase could have occurred as a result of new construc-
tions or through a process of mergers and acquisitions. Evidence from
Hungary suggests that in this instance the latter may have played a more
important role.
One general argument for privatization is that private operators might
increase the efficiency of a company. In order to consider this hypoth-
esis we looked at some efficiency indicators. We limited our attention
to some general aspects of company productivity. For example, turnover
per employee increased for the community-owned waterworks and also
for the multinationals. The magnitude is the same (around 30 per cent),
but the trend seems to be steadier for the multinationals. On the other
hand, no efficiency improvement can be noted for the small private
waterworks. An increase in productivity can be noticed for all types of
water companies during the past ten years, as measured by the length
of water pipeline operated per employee. For community-owned com-
panies the average length of pipeline per employee has grown by 40 per
cent, compared to 88 per cent for multinationals, and about 30 per cent
for other privately operated companies.
We assumed that larger companies might have more opportunities for
increasing productivity (laying off people). Our data reveal (Table 7.7)
that the 20 largest water companies shed fewer employees than the aver-
age of the community-owned firms. Multinationals have been leading
the way in reducing their workforce.
We find that the multinational companies pay wages that are, on
average, 14–25 per cent higher than community-owned companies. The
lowest average wages are paid by the small private waterworks. Again, we
assumed that larger companies may pay higher wages, so we compared
the average wage paid by the multinationals to the wages of the 20 largest
companies. Indeed, although the advantage of the multinationals has
been somewhat reduced, it still remains.
However since we lack data about the profitability, amount of invest-
ment and cost of operation we cannot obtain a complete picture of
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Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 195
Table 7.7 Change in the number of employees, percentage (1995 =100)
Year Community-owned The 20 largest Multinationals Other private
companies companies
1995 100 100 100 100
1996 92 92 88 106
1997 80 90 81 115
1998 75 89 78 107
1999 74 90 76 110
2000 75 87 68 121
2001 72 86 65 100
2002 70 84 62 97
2003 72 83 62 93
2004 74 82 61 87
the efficiency of different companies. We can only confirm that multi-
national companies shed labour to improve efficiency and productivity.
The effect of private sector involvement on water price
With an increase in efficiency observed in most types of company, we
would like to investigate who benefits from such improvements? Does
it lead to a decrease in prices, increase in coverage or do the companies
take them as profits?
These questions would be meaningful only in a full-cost recovery set-
ting, which is not the case in Hungary. As discussed above, water prices
are below the level needed to cover investment and depreciation costs,
and they, only barely hardly cover operation costs. As mentioned earl-
ier, the main reason is that local municipalities do not allow their prices
rise faster, for political reasons. Therefore, if in the past ten years water
prices have grown more quickly than inflation (as indeed they have), this
should be seen as normal from a business point of view. If there are dif-
ferences between the prices of privatized and non-privatized companies,
this might signal at least a difference in relative bargaining power of the
However, in our case price analysis has some problems and shortcom-
ings. First, some of the cases in the database are conglomerates of several
small, local companies. Being conglomerates, they are still not very large
companies, because they bring together small, village water utilities. But
they still set different prices for the different settlements. In other words,
about 25 companies do not have not one but two water prices in the
9780230_520820_08_cha07.tex 27/11/2007 15: 52 Page 196
196 Social Policies and PSP in Water Supply
Table 7.8 Average household water prices, minimum values (HUF, nominal
values, EUR1 =HUF250)
Year Community-owned Private operators Total
Price N Price N Price N
1995 57.23 52 51.63 8 56.49 60
1996 71.49 56 60.96 10 69.89 66
1997 86.52 63 83.35 11 86.05 74
1998 101.13 70 103.22 12 101.43 82
1999 116.14 71 121.42 12 116.90 83
2000 126.74 68 141.02 11 128.73 79
2001 140.18 70 146.54 12 141.11 82
2002 148.83 71 155.28 12 149.76 83
2003 160.37 70 164.68 12 161.00 82
2004 172.91 67 177.02 12 173.54 79
database for each year: a minimum and a maximum price they set for
their consumers. Since water prices are in general lower in towns (because
of the lower marginal cost of supplying water) minimum price would
reflect the reality.
Table 7.8 shows that from 1998, the prices of private operators are
2–11 per cent higher than the prices charged by community-owned com-
panies. We conducted some statistical analysis to see if ownership was
instrumental in having different price. From our findings, we can say
that water privatization has not led to price increase in Hungary. For
instance, for multinationals water prices in 2004 vary from HUF124–
HUF277 among the six companies (Table 7.9). We also observe that
small private companies have higher prices than the multinationals. The
prices of the multinationals correspond almost exactly to the prices of the
community-owned waterworks. The other, small privatized companies
have prices that are, on average, some 10 per cent higher.
Other factors (apart from ownership per se) might also have an impact
on price differences. These might include technology used by the indi-
vidual companies, the geographical characteristics, the availability of
water and so on. But it might also be that other, external factors explain
the price variations – for example, political decisions made by the given
However, we need to be cautious since geography (cost of produc-
tion) and type of ownership may be linked. In this case, the prices
may be higher in private firms, on a relative, rather than an absolute
9780230_520820_08_cha07.tex 27/11/2007 15: 52 Page 197
Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 197
Table 7.9 Average household water prices, minimum values (HUF, nominal
values, EUR1 =HUF250)
Year Community-owned Multinationals Other private Total
1995 57.23 52 50.97 6 53.60 2 56.49 60
1996 71.49 56 59.95 6 62.47 4 69.89 66
1997 86.52 63 81.55 6 85.52 5 86.05 74
1998 101.13 70 97.15 6 109.28 6 101.43 82
1999 116.14 71 113.82 6 129.01 6 116.90 83
2000 126.74 68 126.50 6 158.44 5 128.73 79
2001 140.18 70 138.87 6 154.21 6 141.11 82
2002 148.83 71 149.95 6 160.60 6 149.76 83
2003 160.37 70 158.68 6 170.67 6 161.00 82
2004 172.91 67 168.40 6 185.64 6 173.54 79
scale. Since the costs of water production are different in different places
(experts say that there is a tenfold difference in the costs of the most and
the least expensive water production sites in Hungary), the private oper-
ators could have chosen those settlements where the production costs
tend to be low in absolute terms. In those places even a low price might
hide an increased profit, given that the costs are so low. Indeed, there
are signs of ‘cherry-picking’, especially from multinational investors who
carefully focus on larger cities with high population densities. One would
expect that water tariffs should be lower in bigger cities. This might
suggest that some overpricing is indeed happening in towns and cities.
Another plausible explanation might be that private investors have
been seeking to increase efficiency and have tried to raise their prof-
its by reducing costs, instead of increasing prices. As we saw earlier,
multinationals were in the frontline in reducing their workforce. A third,
and also very plausible explanation would suggest that the institutional
setting of the privatization context determines the behaviour of the
companies. Our case studies suggest that there are guaranteed fixed man-
agement fees for private companies. Or, as in the case of Budapest, the
management fee is not linked to the profits, but rather to the improve-
ments in efficiency. If so, the private investors do not necessarily have to
increase the prices in order to realize gains. This leads us to our previous
explanation of why private companies may choose to increase efficiency
rather than increase prices.
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198 Social Policies and PSP in Water Supply
In this chapter we demonstrated that there is a lack of state capacity to
control and monitor PSP in the water sector in Hungary. PSP often takes
place at the local (municipal) level, and there is no central authority
(Office of Water) that controls or monitors the process. The National
Water Authority deals only with environmental, water management and
technical issues. However, local governments do not necessarily have the
capabilities to regulate the private operators. We argued that PSP in water
started in Hungary without the proper institutional and legal framework
and that this led to several local conflicts.
We also demonstrated that Hungary has some strong social policies
in place. We argued that water prices in Hungary are heavily subsi-
dized, including cross-subsidization (household water prices are lower
than industrial prices), water prices are kept low by local governments
(for political reasons), which is regarded as a hidden subsidy. Water tar-
iffs are not able to cover the operation costs. We also highlighted the
role of central subsidies in keeping prices below a threshold, where the
central government covers a non-negligible part of the water costs from
the state budget.
Such social policies in keeping the prices low lead us to argue that water
affordability does not appear to be a problem in Hungary. However, water
prices have been increasing steadily in Hungary since the regime change
of the early 1990s. Despite this rapid increase, the poorest income group
spends no more than 1.5 per cent of their household expenditure on
water (or 2.63 per cent if we take water and sewerage services). Similarly,
by international standards access to water is not a problem in Hungary.
Piped water is available in practically every settlement, and public foun-
tains are provided free of charge to everyone living within 200 metres.
However, an important fraction of the population, accounting for almost
20 per cent of the poorest households, does not have piped water in their
homes. This access problem is, in fact, an affordability problem: people
do not have the financial capacities for connecting to the main pipes.
The rate of observed price increases is slightly higher in the private
companies than in the community-owned companies. However, priva-
tized companies do not seem to have higher water tariffs. We formu-
lated three explanations for this (none of these should be regarded as
exclusive): the specificities of the social policies, which provide other
incentives for the private operators (fixed management fees or fees linked
to cuts in costs, and so on); the efficiency improvements made by the
private operators (which allow them to realize gains without necessary
9780230_520820_08_cha07.tex 27/11/2007 15: 52 Page 199
Zsolt Boda, Gábor Scheiring, Emanuele Lobina and David Hall 199
increasing prices); and the ‘cherry-picking’ of private investors (choosing
those regions where efficiency gains could be easily realized and prices
are not high).
In conclusion, it is clear that private water companies (especially
multinational corporations) have been successful in increasing effi-
ciency (productivity). However, this has not led to falling prices. Private
companies have not contributed to investments in the infrastructure.
1. When we refer to ‘privatized water companies’ we mean a partially privatized
company owning 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 trans-
fer (welfare measure) which partly compensated people for the low level of
3. The database was provided by the Hungarian Waterworks Association (Magyar
Vízközmü Szövetség). We would like to thank the Association, and in particu-
lar Dr. Mária Papp, the president of the Association, for the help given to our
4. Total water consumption by households (excluding non-household consump-
tion) was 395,187,800 cubic metres in 2003. The average water price in 2003
is HUF161/cubic metre (calculated as the average of the minimum prices, the
average maximum was HUF176 – however, the majority of the providers falls
into the first category).
5. We could also observe the same type of hidden social policy in the case of
energy, especially household gas prices, that were kept artificially low by the
previous government to ease household burdens. The issue became highly
politicized during the elections in 2002, and is still a central topic. Certainly,
this is a legacy of the old socialist system, in which the prices of public services
were kept artificially low.
6. For instance, the transfer of ownership from the state to local governments
was undertaken without a proper evaluation of the value of the assets, or after
making a careful inventory of the state ownership. Local governments do not
even know the value and the physical status of the assets they possess.
7. Pécs offers an interesting example, because some years ago the city took back
the previously privatized waste collection company for similar reasons: it
turned out that prices increased and infrastructure development became more
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... More particularly, the article's legal historical focus helps to provide a more nuanced analysis of regulatory reform in Hungary beyond the privatisation of publicly owned utilities, which has been prevalent in the examination of post-1989 reforms in Central and Eastern Europe. Indeed, while the consequences in the change of water utility ownership from public to private has been examined in the literature (Boda and Scheiring, 2006;Boda et al., 2008), the changes in the operation and the organisation both after 1989 and during the reform of the years 2010e2014 have been less understood, despite their relevance. The role of the Hungarian state not only as owner, but as regulator and facilitator (or inhibitor) of organisational transformation, is examined in detail. ...
An environmental frontrunner in the Central and Eastern European regions since the late 1990s, Hungary followed a gradual but steady approximation progress to the EU environmental legislation. Previous research established an important role of the participation of economic and societal stakeholders in the decision-making and implementation process based on EU environmental legislation in Hungary. With the victory of the FIDESZ party in the parliamentary elections of 2010, the new government started to change the ‘rules of the game’ by nationalising infrastructures and weakening market access to foreign stakeholders. Focusing on the water and waste management sectors, the article analyzes the stages that brought Hungary to the recent governments’ policy changes. We argue that these changes have departed from the environmental policy practices established during the EU accession process and represent a challenge and a potential backsliding in the implementation of the EU environmental legislation in Hungary. Such changes in policy policies need to be seen in the context of the recent transformation of the political order and of the state–market relations in Hungary.
Technical Report
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The Danube Regional Project (DRP) consists of several components and numerous activities, one of which was "Assessment and Development of Municipal Water and Wastewater Tariffs and Effluent Charges in the Danube River Basin" (A grouping of activities 1.6 and 1.7 of Project Component 1). This work often took the shorthand name "Tariffs and Effluent Charges Project" and Phase I of this work was undertaken by a team of country, regional, and international consultants. Phase I of the UNDP/GEF DRP ended in mid-2004 and many of the results of Phase I the Tariffs and Effluent Charges Project are reported in two volumes. Volume 2 is entitled Country-Specific Issues and Proposed Tariff and Charge Reforms. It consists of country reports for each of the seven countries examined most extensively by our project. Each country report, in turn, consists of three documents: a case study, a national profile, and a brief introduction and summary document. The principle author(s) of the seven country reports were the country consultants of the Project Team.
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An analysis of water and sewerage PSP services offered by 173 companies based on the examination of 1,379 contracts. The Yearbook started in 1999 and provided an annual review on the development of PSP worldwide.
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Water resources management approaches around the world are changing dramatically. This “changing water paradigm” has many components, including a shift away from sole, or even primary, reliance on finding new sources of supply to address perceived new demands, a growing emphasis on incorporating ecological values into water policy, a re-emphasis on meeting basic human needs for water services, and a conscious breaking of the ties between economic growth and water use. A reliance on physical solutions continues to dominate traditional planning approaches, but these solutions are facing increasing opposition. At the same time, new methods are being developed to meet the demands of growing populations without requiring major new construction or new large-scale water transfers from one region to another. More and more water suppliers and planning agencies are beginning to explore efficiency improvements, implement options for managing demand, and reallocating water among users to reduce projected gaps and meet future needs. The connections between water and food are receiving increasing attention as the concerns of food experts begin to encompass the realities of water availability. These shifts have not come easily; they have met strong internal opposition. They are still not universally accepted, and they may not be permanent. Nevertheless, these changes represent a real shift in the way humans think about water use. This paper summarizes the components of this ongoing shift and looks at the new paths being explored. It evaluates the major reasons for the change in approach and discusses the applicability of these new concepts in different parts of the world
The countries in Central and Eastern Europe must determine what policies will most encourage enterprise restructuring, which is essential for the transition to a normal market economy and for accession to the European Union. Restructuring involves shedding surplus labor, manufacturing higher quality products, finding new markets in Western countries, and spinning off social and unneeded assets. In this paper, we analyze the financial and operating data (1992 to 1995) for more than 6,300 industrial firms in seven countries of the region: Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, and Slovenia. We compare the extent of restructuring across firms in these seven countries to determine which country's policies are most effective in encouraging restructuring. All firms were previously owned by the state and many still are. These firms account for 40 to 95 percent of the industrial employment in these countries. In our analysis we examined the following measures of restructuring: • Profitability • Proportion of firms with a positive operating cash flow, • Average operating cash flow as a percent of revenue, • Growth in labor productivity, • Growth in total factor productivity, and • Growth in exports. The results were consistent for all six measures. We next used econometric analysis to identify the government policies that most encouraged firms to restructure. In this analysis, we used as the measure of restructuring the increase in total factor productivity (the increase in output relative to the increase in all inputs). Although substantial progress towards profitability was made in five of the countries (Czech Republic, Hungary, Poland, Slovak Republic, and Slovenia), the firms are not as profitable as those in a developed market economy (in which typically 95 percent of the firms are profitable). In contrast, firms in Bulgaria and Romania showed little improvement in profitability over this period. Privatization had a large impact on restructuring. On average, a firm that has been privatized for four years will increase productivity 3-5 times more than a similar firm that is still in state ownership. We found little difference in productivity between privatized firms in countries that used mass privatization methods (Czech and Slovak Republics, Poland) and in the other countries, which, until recently, have used standard (case-by-case) methods. In other words, either method of privatization for the same period of time will (on average) show the same degree of restructuring. Based on an econometric analysis of Czech firms, we found that firms with concentrated ownership have restructured more than firms with dispersed ownership. Firms with loans from and ownership ties to banks restructured even more. This suggests that banks may be able to better monitor the performance of managers and encourage restructuring if they are both owners and lenders to the firms. There are two related policy questions concerning the role of banks in the restructuring of firms. The first question is whether governments should recapitalize the large banks (typically still state-owned) to compensate for their bad loans. The second question is whether banks should be encouraged to forgive (write-off) bad loans made to firms. Enterprise managers often argue that these two policies will allow them to restructure more easily. Our econometric analysis examined first whether additional bank lending actually encourages restructuring. The results are mixed. In the early years of transition, additional bank lending in all countries except for Hungary was actually associated with a decline in subsequent productivity and profitability. This suggests that bank loans were not helping to restructure firms but were financing their losses. By 1995, however, banks in five out of the seven countries seemed to be making more sound lending decisions and supporting restructuring. The exceptions were Bulgaria and Romania. When we divided the sample into privatized and state-owned firms, it turned out that poor bank lending was associated with state-owned firms. In all countries banks make sound lending decisions for privatized firms, but continued to support ailing state firms. We next examined firms burdened by large loans from banks that they cannot currently repay. We found that high levels of indebtedness at the start of transition did not hinder restructuring. One reason is that such firms may be under greater pressure to restructure. Another related reason is that firms in the region seem to be ingenious at finding sources other than loans from banks to finance restructuring. These sources may include loans from new private banks, credits from foreign buyers, new equity, joint ventures, and, most importantly, the firm's own cash flow. We also found that the amount of bad loans and thus the need to recapitalize the banks is declining in those countries with rapid restructuring. We estimated the ability of firms in our data set to repay their bank loans based on their operating cash flow. We conclude that recapitalizing banks and encouraging them to forgive loans is unlikely to help firms restructure very much. In fact, poor bank lending practices may discourage restructuring and result in additional bad loans. A safer course of action is to recapitalize banks only at the time of their privatization and after a large share of enterprises are privatized. That way there is more certainty that new bank owners will improve the quality of lending, support restructuring, and avoid another increase in bad loans.
Based on empirical evidence, this paper looks at experience with privatized water supply and sanitation concessions and operating contracts in transition and developing countries, with particular reference to Latin America. The paper is an attempt to address the complexity of issues affecting private sector participation in the water sector from a dynamic point of view, taking into account how the interests, objectives and resources of private sector operators continuously shape their relationships with local stakeholders, citizens and local governments alike, and how the interaction between multinational companies and other actors affect the developmental impact of private sector participation. It is argued that the introduction of commercial considerations into the system and the profit-seeking behaviour of private water operators are major determinants of the economic, social, political and environmental results of public–private partnerships (PPPs). Such factors may explain the discrepancy between the theory pointing at private sector participation as the way forward and the results of private sector participation in practice.