Water supply and management: the Abbanoa case study within the European framework

Index

1. Normative framework for water supply and management _______________________________ 2

1.1 EU legislation and influence on domestic water services. __________________________________ 3

1.2 Italian Legislation for water supply ____________________________________________________ 4

1.3 Sardinian regional normative framework ________________________________________________ 6

2) Existing models and tendencies in the EU and evidences on problems arising for each. _______ 7

2.1 Full privatization __________________________________________________________________ 8

2.2 Public-Private Partnership: lease, management contracts, concessions and IPPP _________________ 9

2.3 Public management: formal or organizational privatization _______________________________ 11

3) Case study: Abbanoa (in house in Sardinia region) __________________________________ 12

3.1 History of the company ____________________________________________________________ 12

3.2 Financial problems in Abbanoa ______________________________________________________ 13

3.3 Quality and sustainability issues ______________________________________________________ 14

Conclusions. __________________________________________________________________________ 17

Abstract

The aim of this work is to deepen into the thorny problem of domestic water supply and management.

The debate is still open either at international and local level, working on the best model (public, private,

mixed ownership and management) to solve the trade off between quality of the services (related to efficient

administration and investment capacity, normally more typical of private companies) and the respect of

social rights to access (better ensured by the public sector) of such an essential and peculiar common good as

it is water.

Departing from an analysis of the legislation (European, National, Regional), which at each level affects the

management arrangements of water supply, we will summarize theoretical and empirical evidences within

the European Union of pros and cons of each model, and then deepen into the specific case of Sardinian

Regional in-house company of water services, Abbanoa.

For it, the process of its constitution and the main administrative and financial problems will be investigated ,

in order to distinguish the issues linked to the SOE model, and those arose by specific contingencies, to

better analyze failures causes and possible solutions.

The focus on the EU of the paper is due to the non negligible influence of its whole regulation in

Governments decisions and regulation of the water sector: indeed, while the EU is encouraging a

privatization under the guise of competition disposals and modernization, some local, regional, and

national governments of member States are re-publicising or showing resolute intention to maintain the

public ownership and control over water sector.

1. Normative framework for water supply and management

1.1 EU legislation and influence on domestic water services.

The EU influence in the sector is complex or, as defined by the European Commission, extensive, flexible

and fit1. The EU Council, Parliament and Commission treated the subject under different aspects, facing

water scarcity2 and competitive uses (agricultural, industrial, domestic), its sustainable management

3,

environmental4 and health protection, establishing standards for bathing

5 and drinking water

6 in public

supply and legislation on waste water7 and on chemicals

8 and industrial emissions.

As the purpose/focus of this work is to compare theories and results from public, private, and mixed

management of water supply models in Europe, to better analyze the specific management organization in

Sardinia, we will concentrate rather on the application of competition rule and on the requirements for public

procurement, as they attain/influence more specifically the choice of management model, while quality and

environmental standard requirements will only be marginally taken into account, as not conducive for the

specific case.

Competition rule: SGIE, public procurement, State aid.

Water distribution can be defined as a natural monopoly (as many other utilities), mainly for two reasons:

one above all the high costs of the transport, up to 50% of the cost for 100km (fixed sunk costs are up to

70%), reducing the chances of competition in domestic use. From this aspect derives the traditional local

provision and management, with vertical integration. The secondary main features entailed in the water

sector are the environmental and health issues, together with the need to ensure right to access (quality

standards and equality of access) which brought most of public national, regional, and local authorities in

Europe to control water supply directly or by giving exclusive rights (also due to the scarcity of the source).

However, while water distribution for domestic purposes can be considered to be a natural monopoly, the

supply of water and waste water services is not. Large water consumers could in theory be supplied by a

neighbor operator (either via specific pipeline for the site or via third party access to an existing pipeline), so

questioning on market competition and rules application isnt totally redundant.

Competition rule applies only when there is an effect on trade for Member States competitors, so for

domestic supply would be especially applicable: in border-areas (with the chance of neighbor suppliers); if

the water consumer uses the water services as an input into goods that are then traded; whether the water

operator is dominant on a substantial part of the European Community, or when there is a cumulative effect

from a number of smaller networks. As well, when a contract or concession is outsourced and an operator in

another Member State might be interested in it, the public procurement should ensure competition.

Therefore to utilities EU Competition rule applies, but with some wider allowance and softer criteria. Water

and sewerage provision is conducted in most Member States through public undertakings or undertakings

1 A Blueprint to Safeguard Europes Water resources COM(2012)673

2 Water Scarcity and Drought Policy COM/2007/0414; A Blueprint to Safeguard Europes Water Resources COM (2012)673 with suggestions for future water policies, . 3 The Water Framework Directive (2000/60/EC) of 23 October 2000 concerning water resources management; The Sustainable Consumption and

Production Action Plan COM (2008). 4 White Paper: Adaptation to Climate Change Framework COM (2009); Environmental Technologies Action Plan, COM (2004) 38; Floods Directive 2007/60/EC; Groundwater Directive Directive 2006/118/EC 5 The Bathing Waters Directive (76/160/EEC) of 1976 replaced by the Bathing Water Directive 2006/7/EC 6 Drinking Water Directive 98/83/EC 7 Urban Waste Water Directive 91/271/EEC concerning discharge of municipal and some industrial waste water 8 Detergents Regulation Reg (EC) No 648/2004; Industrial Emissions Directive 2010/75/EU; Nitrates Directive 91/676/EEC; Persistent Organic Pollutants (POPs) Reg (EC) No 850/2004; Priority Substances Directive 2008/105/EC (PSD); Regulatory Framework for the Management of Chemicals (REACH) Reg (EC) No 1907/2006

granted with special or exclusive rights, subjects to the competition rule by art. 106 TFEU (ex art 86 TEC, ex

art 90 TEEC), which anyway allows some narrow exceptions to the undertakings of Services of General

Economic Interest (SGEI), applying insofar as the application of the rule does not obstruct the performance,

in law or in fact, of the particular tasks assigned to them.

The concept of SGEI, already present in the Rome Treaty, was further explained mainly by the Court on the

90s, and then by the Commission, with distinct communications9. Especially, we can read on the 2004

Green Paper, that water services fall under the definition of SGEI, but a modernization rather than a

liberalization o f the sector is foreseen for it, according to the European Parliament decision. The 2000 Water

Framework Directive10

defines water as a not a commercial product like any other but, rather, a heritage

which must be protected, defended and treated as such. Still, economical analysis of water management and

supply were requested to Member States, pushing toward the application of the cost recovery principle,

typical of competition law for commercial goods, which can be seen as a pressure towards an increase of

market competition in the sector. Pressure towards privatization is not then explicitly defined, rather formally

denied, mainly after official refusal of Sweden and Ireland and of the negative of the European Parliament,

but implicitly demanded by the whole integration system, which restricts state aid, regulate public

procurements and public undertakings or exclusive rights, which in the whole: make difficult reserved

market through article 102 and 106 of the TFEU, direct and indirect financial assistance must qualify very

restrictive assessment under Article 107 on State Aid, and budgetary policy is strongly supervised due to

Article 12311

. As a result, public undertaking might be forced to change its form into ordinary corporations

under corporate law with the government probably holding the majority of its shares, which means that they

are practically privatized and will be governed by private law. However, the Court in the Almark case found

that compensation for SGEI is not State Aid, if it fulfills four criteria12

.Anyway, State Aid normative

application to the water sector will be treated specifically in the case study.

1.2 Italian Legislation for water supply

The first normative reference about the water supply in Italy can be found in 1904 when the king emanated

an act in which there was a principle that have featured our vision of water supply during the years. The main

part of the law states that: The government is in charge of the supreme safeguard of public water, including

public works related to water supply and inspections in those works. This statement highlight the Italian

adversity to privatize water and related services. Before the Italian Constitution other laws were added as

regard the safeguard of water quality , as, for instance in 1934 was prohibited to modify natural waterways

whenever these changes were harmful to public health.

The highest normative reference is the Constitution, that in article 117 states the legislative power of State

and Regions in matter. Although there are many general issues involved in the governments legislative

9COM(96)443 Services of General Interest in Europe; COM(2003)270 Green paper on services of general interest; COM(2004) 374 White Paper on services of general interest"; COM(2007)725 Services of general interest, including social services of general interest:a new European commitment; COM(2011)146 Reform of the EU State Aid Rules on Services of General Economic Interest 10 2000/60/EC Directive, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32000L0060 112.Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States

(hereinafter referred to as national central banks) in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or

other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase

directly from them by the European Central Bank or national central banks of debt instruments. 12 the recipient undertaking must actually have public service obligations to discharge; the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings; the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking.

power such as environmental protection that in some ways could allude to safeguard of waterways at all,

the main trend in the past has been the delegation of water supply to Regions and local municipalities.

With the act emanated on the 4th of February 1963, the minister of public works was made in charge to

implement the so called Piano Regolatore degli Acquedotti (Regulatory plan for aqueducts), that delegated

for the implementation of water supply public and private organizations. Their aim was to better individuate

and allocate water resources, to plan upgrading and renovation works in water supply and sewerage disposal.

With the law of January of 1972 n 8 the legislative power of water resources was shifted to Regions.

In 1989 a law was issued to create an informative system of water resources. The aim was to distinguish

basins of national importance from basins of regional importance. Another task was to create the Piano di

bacino(Basin Plan) to:

Describe the environment

Describe utilization, infrastructures and waters quality

Describe efficiency and level of utilization of the infrastructures

In the law 36/1994 knew as the Gallis Reform, the direction was to modernize and re-organize water supply.

The basic aims were:

Territorial integration

A service lead by one independent operator

Separation water operator and owner of infrastructures

Efficiency and effectiveness of the service

In 1999 the law was restyled but including the same principles such as solidarity in using water and prior use

of the water for human beings (domestic use).

The Gallis reform in a pratical way identified 92 ATO (Territorial Optimal Areas). The main idea was to

organize the water supply, that was counting at the time something like 13000 managers of the service. The

main principle behind this reform was a new industrial logic applied to the water supply allowing

competition between private firms in order to manage the water supply with the advantage of lower taxes

related to this kind of investment, pushing toward the liberalization and privatization of water sector.

However the trend was still to delegate the water service to in-house companies delivered by the public

sector, but in the regions and municipalities which followed the direction indicated by the reform, few large

firms obtained concessions in more ATOs. The concentration in few companies (ACEA, Acquedotto

Pugliese, Hera, Iride, Enia) of long lasting concessions around Italy created an oligopoly de facto. These

companies showed the tendency in time to become strong multi-utilities, managing and obtaining big

contracts as well in the field of energy, garbage disposal, environmental services, and outside Italy.

(e.g.ACEA is active in 6 Italian ATOs, serving 8Millions people, and 5Millions people served in Peru,

Honduras, Dominican Republic, and Columbia until 2012 internalization). Another problem originated by

these last concessions was the need to often re-negotiate them.

The dominant presence of mixed firms; with part of public and private shares, was also creating confusion in

the edge between public and private responsibilities. The reason of this confusion was that most of the local

entities delegated to satisfy citizens needs, were at the same time shareholders interested on the expansion of

the business water supply, as they participated in profit. This problem is reflected also in the case of in-house

companies.

In 2000 was created the TUEL (Testo Unico Enti Locali) which regulated also public procurement and

concessions. A Direct concession was possible only for public companies, while for spa was necessary to

open a public tender.

Another law in terms of water public services was issued in 2008 by Berlusconis Government which aimed

to provide the by-law inclusion in water tariffs of the remuneration of invested capital: a financial principle

that was seen as unjust for public utilities by the citizens, who obtained and won a referendum to abrogate

the rule in June 2011.

In 2009 was issued the Ronchis law that, translating nationally EU directives on public procurement,

provided a new legislation for public tenders in local services of economic interest.

It provided an ordinary and an extraordinary method. The ordinary method provided that water supply to be

assigned to mixed or private firms (the private holding at least the 40%) through open public tenders. In

house companies would be allowed to obtain direct concessions only in extraordinary situations, to be

motivated, and to be accepted by the Antitrust Authority. In house companies will be allowed to maintain the

management contracts after 31/12/2011 only if transferring at least the 40% of the capital to privates,

otherwise shall be dismantled. Listed companies had to lower public shares to a 40%. Even if stating that

water control shall be public, as well as the ownership of resources, de facto, the article 15 of the Ronchi law

obliges to liberalize water services.

On the 24th of January 2012 was issued a new Legislative Decrete, adapting the Ronchi law to the

referendum decision and to the new EU normative on SGEI, which: asked to Governments a relation on the

feasibility of the liberalization of all local services of economic interest without affecting universal access

and responding to the needs of the community, allowing them to commit to a in-house one or more services

only by prior evidencing the specific failures of the market and the benefits of a public management, with the

binding opinion of the Antitrust Authority.

Danata confirm that in mixed-owned companies fees are higher than on State-owned ones, increasing of an

average 33%. Water losses are still high on account of insufficient maintenance of the aqueducts, but with

more heterogeneous results (improvements, maintenance or worsening level). Still, the dispersion continues

to match that of early 1990s, 33% average, much higher than other EU countries (26% in France, 22% in

Spain, 19%in UK, 7.3% in Germany).

In conclusion we can say that the Italian national legislation produced over time, in accordance with EU

legislation, a restrictive and liberalizing normative on water supply as a local service of general economic

interest, which encountered public opposition, and didnt bring notable expected improvement. However

Autonomous Regions maintained some power to choose an in-house public management model for water

services, while municipalities may do so only by demonstrating the low economic interest involved

(

- The reconnaissance of infrastructural water works for the granting of SII (integrated water service) ;

- The choice of the supply management model and of the granting system;

- Entrustment procedures;

- The definition of the Area Plan and the tariffs of the SII ;

- The annual update of the remedial plan and financial plan

- The control of the level of delivered service

The Regional Law 19/2006 (Provisions on water resources and river basins) required the region to uphold

water as an heritage and a limited resource of high environmental cultural and economic value; it also

considers the access to water as a human right, individually and collectively, and it regulates the usage, in

order to safeguard the rights and expectations of future generations.

The law defines the regional territory as a unique river basin of competence of the Region, representing the

River Basin District of Sardinia, establishing a Regional Authority of the River Basin whose organs are the

Institutional Committee and the Regional Agency of the river basin district of Sardinia.

The Regional Agency has the functions of technical-operative secretary, of logistic and functional support to

the Authority for the application of the Directive 2000/60/CE, and of supporting the Region in its functions

of R&D and control.

With the Regional Law 7may 2009, the Institutional Committee gave mandate to the Regional Authority to

conduct all the activities to adopt a Management Plan before established terms, enabling the establishment of

a scientific technical committee in key sectors.

2) Existing models and tendencies in the EU and evidences on problems arising for each.

As seen in the normative part of the essay, a basic form of privatization and dismantling of public services

production has been propelled by the European Union legislation as a whole. Still, public direct management

of water supply and services is allowed, but mainly through the creation of in house companies, which is

public companies converted into a private law subject, obtaining some of the advantages of privatization but

maintaining ownership and control of the services. In this sense, three types of management models of public

utilities can be identified:

1)Full privatization, complete undertakings of tasks and ownership transferred (sold) to a private entity, as in

England and Whales.

2) Formal or organizational privatization, so publicly owned companies (the so called in-house) which in

substance remains a direct public management, but the supplier is formally transformed into a subject under

private law, like municipal or regional enterprises, managed autonomously according to business general

principle, which can be found in Germany, Austria, Finland and the Netherlands (the case study of Abbanoa

in Sardinia as well falls under this category).

3) Functional privatization, or Competition for monopolies in tendered market with fixed terms: tasks of

supplying water (and of operating in the water networks for longer concessions as in France) are temporarily

delegated, usually through public tenders and so called PPP contracts.

The following scheme will summarize the main characteristics of the three categories taken into exam.

Management options for domestic water services

Full privatization

All assets are permanently transferred to

a private investor

In UK and Whales

Functional privatization (Public-PrivatePartnerships)

Concessions (long-term)

Lease and Management contracts (short term)

Institutional PPPs (mixed companies)

Long-term concessions

(France)

Lease and management

contracts (Germany)

IPPPs Mixed companies

(Italy)

Formal privatization

State-Owned Enterprise, formally turned into in-house

companies (subject under private law)

Germany, Austria, Finland and the

Netherlands

2.1 Full privatization

Private-sector involvement in infrastructures and utilities was vigorously promoted by international

institutions in the 1990s and early 2000s. It was expected to inject both investment and efficiency into these

sectors, replacing traditional public-sector systems suffering from under-investment and inefficiency due to

excessive political interference and rent-seeking behavior by vested interests including bureaucracies and

labour.

Benefits expected from liberalization and privatization are linked to increased competition, which should

derives in improved efficiency and more competitive tariffs, together with an increase in investments for

expanded coverage and improved quality. But evidences of such benefits are small, dispersed, and slow,

whereas the impact of price hikes and job losses is concentrated, immediate13.

A first reason can be found in the fact that these improvement are expected to be assured by the market

competition: but in the water sector, competition can be assured mainly for the market, which is, the

competition to obtain concessions or win the bid to the services, while competition in the market is possible

mainly in alternatives for large-scale industrial consumers, while hard to obtain for domestic supply due to

the specificity of water utility, with high fixed costs and lower per unit costs of output.

As well, benefits expected are not necessarily met: for example, lack of investments and short term view are

not automatically solved, as to please shareholders, private companies may seek to increase short term profits

and avoid investing in long term projects.

Because of natural monopoly features, and social and political considerations, full divestiture of assets is rare

especially in water and sanitation. Some results of full privatization can be found analyzing the case of UK

13

These findings is remarked by different studies and papers, among which is especially illuminating the final report of a EC funded project (PIQUE), which analyses results of liberalization and privatization in four public service sector in six European countries (Austria, Belgium, Germany, Sweden, Poland, UK), especially the impacts on employment, quality and productivity.

and Whales, where through the Water Act in 1989 ten water regional authorities were privatized. Again,

studies show a big gap between benefits expected and obtained.

The privatization happened through a unique global undertaking, raising an additional issue of high

transaction costs for the creation of an unprecedented Regulatory Governmental Agency, for which high

costs are paid by consumers in taxes.

Main figures of lack of the expected social benefits observable in the UK:

- Increase in water tariffs (by a 46% in ten years, 1989-99)14

- Employment in the sector decreased substantially (21.5% of the former employed lost their jobs)

- Productivity increased smoothly, and this increase is related mainly to the cuts of personnel15

- Operational profits raised (+142%) (which means that the government is missing out dividends)

- Investments reduced

- Public health was jeopardized through cut-offs for non-payment (however, this was made illegal in

1998 along with prepayment meters and 'trickle valves').

To improve this situation, outcomes of researches suggest: an innovative approach to competition, effective

regulation and contract enforcement.

Still, full privatization is in general not advisable, even by theory, for natural monopolies, as likely to convert

into private monopolies, lacking competition-related benefits and requiring high agency costs for the public

to control the effective compliance with obligations related to concessions, which in the water case are even

higher, as high environmental and health issues are involved.

2.2 Public-Private Partnership: lease, management contracts, concessions and IPPP

Many different names are used by governments for their various forms of PPPs, due to different traditions

and legislation, but still we can identify some common aspects worldwide.

As defined by the World Bank Group, public private partnerships (PPPs) are Long-term contractual

arrangement between a public entity or authority and a private entity for providing a public asset or service

in which the private party bears significant risk and management responsibility. PPPs can vary widely, as

they are substantially free contracts between a public entity and private ones, subject to national legislation

and tradition, and to the EU directives on public procurement, so they may present different arrangements for

Construction, Operation, Finance and Ownership.

In a public-private partnership, the ownership of assets remains public (even though might be shared in

actual IPPP, institutionalized public-private partnerships) and only certain functions are delegated to a

private company for a specific period.

PPPs are the most common form of private sector participation in water supply today. In order to better

analyze general characteristics and impacts of PPPs in water management, we will divide them into two

categories, based on the length of the contract: short-term PPP and long-term PPP.

14

Pique final report. 15

Public-service providers in liberalized markets often combine an increase in productivity with the lowering of labour costs by paying lower wages or using atypical forms of employment (often in combination with outsourcing and the creation of independent subsidiaries). [] However, measures to enhance quality have only been observed where they do not conflict with the aim of cutting costs and employment. Quite on the contrary, quality aspects that require additional labour resources have often been compromised as a result of liberalization and privatization PIQUE final report, page 107

Short term PPP: characteristics, benefits and disadvantages.

We will intend short term contracts, those lasting about between 5 and 15 years.

In these category will fall management contracts and lease contracts: in both of them, the private operator is

only responsible for running the system, in exchange for a fee that is to some extent performance-related.

Investment is financed and carried out by the public sector. The main difference is that lease contracts are

longer, and take up a major risk to the private operator, who receive a share of revenues instead of a fee. As

their characteristics and impacts are similar, they can be analyzed jointly.

The main characteristic of this scenario is the strong competition created by the shortening of the length of

delegated management contracts. Due to the short length of the contracts, it is assumed that it is the local

public authorities which are responsible for the major investments. Most contracts take the form of delegated

management contracts, mostly lease. Large private operators essentially dominate the European market. This

can largely be explained by their considerable experience in this particular type of contracts but also by their

very high technological expertise, their large financial capacity, as well as their management know-how.

This scenario came out as result of two main forces, which are the lobbying of trans-national corporations

(TNCs), and the desire of the EU to introduce more competition in the sector.

Long-term contracts: concessions

We will consider Long term PPPs those contracts lasting 15-30 years. In this case the assets are leased to the

private operator who receives a share of revenues. He thus typically bears a higher commercial risk than

under a management contract. Investment is fully or mostly financed and carried out by the public sector.

In this category we must underline the case of concession. Under a concession the private operator is

responsible for running the entire system. Investment is mostly or fully financed and carried out by the

private operator. The duration is typically 2030 years. In this scenario, the public authority is the one which

is responsible for the service. The larger the responsible authority and its technical capabilities, the more

balanced the bargaining power with the operator is. The scale of the responsible authority is not necessarily

modeled on the scale of the service for example the authority can be in charge of several services on

different networks, and take advantage of this for setting a comparison process. The responsible authority

remains the legal owner, in concession contracts, the infrastructure is financed and owned by the operator

until the end of contract.

The responsibility for investment depends on contractual arrangements between the authority and the

operator.

France is the first place where concessions have been applied. Three companies (SUEZ, Veolia Water

formerly known as Vivendi, Bouygues/SAUR) serve the 80% of the French market, to about 45million

people. Water plants remained mostly public property, while investments cost relay on the private providers,

which are free to set water prices. In 1992 was approved a law to prevent corruption and increase

competition, which obtained a shortening of concessions to an average of 11 years, the decline of prices of a

9%, and an increase of the average number of bids for given contracts.

2.3 Public management: formal or organizational privatization

Formal or Organizational privatization represent formal turn of State-Owned Enterprise into in-house

companies (subject under private law), maintaining public government full ownership and control

over the company. It is considered then a direct public management, which private law form should

be there to ensure a better economic management.

Public direct management in water sector was the most common in the EU in the 90s (Denmark,

Luxembourg, Sweden, Austria, Finland, Northern Ireland, Ireland, Italy), and while in some regions

pressures and financial restrictions are obtaining the partial privatization (mainly through market

tendering of the service), it is still in use in countries such as Germany and Austria, through

municipal or intermunicipal in house companies.

The reasons for a public direct management tradition have already been described and can be

founded in the high social need to control and in market failure State intervention (natural

monopoly).

The specific strengths of public direct management indie are:

commitment to ensure a universal service (low tariffs)

incentives (political interest in maintaining quality of drinking water and sewage management);

expertise and incentives to ensure high technical levels of wastewater treatment (health risk)

better capacity and interest in protecting natural water cycles

non-for profit interests

Traditionally recognized weaknesses of public management are:

Corruption and political influence

Low efficiency (high rates of water loss)

Low investments ability

Excessive labour protection

The mechanism of full-cost recovery is codified by law

One of the main problem is also characterized by a level of corruption that make sure this model

changeable, water involves large flows of public money, and projects are complex and difficult to

standardize, but a solution can be citizens participation as a way to empower the community.

The protection of the sources and environment must be a high priority, water provision is seen as

fundamental service to citizens cannot be delegated to private companies and it is also clear that water cannot

become a luxury good and that customers have a right to have water clear at reasonable prices.

The suggestions to improve this system is given by authors but in particular by citizens, whose struggling for

public water last year produced the first effective European Citizens Initiative submission for a EU law in

this direction, with 1.618.000 citizens firms.

Publicly-owned companies should offer a participatory processes to evaluate how effectively they meet the

needs of the people, as it happened in Grenoble (France) or in Amsterdam.

Every year should be essential define goals and tasks. Reduce the power of the law should be very important

to protect in its constitution the water, adopting for example a water charter as is happened in Vienna in

2001, as signal against liberalization and privatization pressures from the EU.

Moreover, makes annual investments in network improvements to reduce leakages and to contribute to

reduction in water consumption.

The efficiency and effectiveness of such a management are directly linked to cultural issues on

administrative and political accountability, transparence and citizens participation.

Some best practices have been introduced in countries such as the Netherlands, France and Germany, with

clients representatives sitting in the board of water companies.

3) Case study: Abbanoa, in house water services provider in Sardinia region

3.1 History of the company

Abbanoa is an industrial reality of fundamental and peculiar importance in Sardinia's economy, absolving the

task of management of water services.

In detail, Abbanoa deals with:

- Capture, purification, distribution of potable water

- Collect, treat municipal and industrial wastewater

- Water reuse refined after the sewage for irrigation civilians

ABBANOA s.p.a. is the in-house company in charge of the management of integrated water services in-in

the region; it was created in December 2005, on the initiative of the Authority the Optimal (ATO) of

Sardinia, by the merge of former municipal and consorted companies such as ESAF s.p.a, Govossai s.p.a,

SIM s.p.a, S.I.I.NO.S. s.p.a., UNIAQUE SARDEGNA s.p.a.; whose debts, infrastructures were transferred

to Abbanoa. The 130 municipalities converged in the company became shareholder of the 85% of social

capital of Abbanoa, the left over belonging to the Regional government of Sardinia.

The water service is divided into production processes affecting hundreds of installations and thousands of

miles of networks. The sector provides direct and indirect employment to over 3000 operators.

"In house" refers to the type of configuration of a corporation, "Maid", where the company's share capital

consists of the complex of plant and equipment property constituting the Sardinian Integrated Water Service.

Both the employees and the board of directors of ABBANOA are the epitome of the staff, boards and

managers of former smallest municipal companies, which converged in the new company without any other

selection or further preparation.

3.2 Financial problems in Abbanoa

Through our analyses of the financial statement we found basically two main kinds of financial problems in

Abbanoa . The first is an historical problem connected with the inception of Abbanoa, while the second is a

solvency problem mainly related to a misalignment in deadlines between debts and credits.

Dealing with the historical problem, we can say that at the beginning, the former company (ESAF), left to

Abbanoa lot of debts and bad infrastructures in order to pursue an efficient water supply. There were

something like 60% of water losses cause of the bad infrastructures. This problem hasnt been resolved yet.

In addition the revenues were covering only the 58% of the operative costs.

To these problems we must add that its inception was originated by the conferral of more than 300

municipalities, which became shareholders of the new company, with the Regional government of Sardinia

(from now on RAS) owning the 15% of shares (but now, as a result of the Restructuring Aid, holds the 57%).

The initial contributions of many municipalities was often based on old machineries with no real economic

value (or with a lower value than the declared one), which originated a gap between subscribed capital and

real equities, and high costs of disposal and restoration. The second problem is a solvency problem due to a

bad management of credits and debts. A second reason of this problem is the insolvency of customers,

which can be referred as a cultural and historical reluctance of lower classes to pay for public essential

goods.

As regards the customers insolvency the credit value in the short term increased more than 15% for an

amount of more than 100 millions of euros and could be linked to increase in prices and a lower perception

of the quality of the service. The graph below represents the percentage of customers credits out of the total.

In order to have a more detailed view, we must report that

most of these credits will be available in the long term (over

one year).

Total debts are lower than total credits of about 13 millions.

The main problem is that we are not certain that all those

credits will be repaid effectively. However in the short term

there is still a problem. The graph below shows the

percentage of short term credits compared to short term

debts.

Despite a similar percentage, the difference between

these percentage represent more than eighty Millions

gap in short term debits and credits, for which we can

deduce a serious problem of insolvency in the short

term ,which means, no liquidity. In addition the

composition of debts suggest the repayment of most of

them cannot be postponed. An example could be

considered debts versus suppliers.

95%

5%

Credits' composition Abbanoa

Clients/Citizens Others

58%

42%

short term debts

short term credits

The other graph above represents the debts composition:

In conclusion we can say that Abbanoa shall raise an

high amount of equity to solve its financial crisis.

This problem is closely related to the restructuring

aid that the Italian government decided to give to

Abbanoa in order to make the company solvent. This

aid was examined in July 2013 by the European

Commission16

to assess if it could infringe the free

trade principles, competition rules and general

normative of the treaties, being or not considerable as

a State Aid.

Abbanoa is considered an in house public company, notwithstanding either the EU and the Italian

legislation allow the private sector to drive the water supply. The European Commission assessed that this

restructuring aid plan may cause just a low and not relevant distortion in the competition for water supply in

Sardinia and, however, it can be defined as a state aid but permissible in the respect of certain conditions.

One of them is the reduction of the grant of three years. After that the water supply in Sardinia will be object

of a transparent tender. This remarkable term transparent tender, suggest us to consider that the purpose of

the European Commission is, after Abbanoa, to leave the water supply in the hands of a private company

although there is no strong recommendation in order to avoid a new in house company.

As a matter of fact the European Commission asked periodical reports to verify the implementation of this

restructuring plan, suggested to avoid further cash transfer than strictly necessary to Abbanoa in order to

protect the competition and to not advantage the company. Taking into account the suggestions given by the

European Commission , Regione Sardegna started to implement the following recovering plan for Abbanoa

in according with the compliance of the DELIBERAZIONE N. 35/1DEL28.8.2013. Here is a frame of the

rebalancing plan.

This plan was thought by Abbanoa and refers to a overall amount of 187 million euros. This solution is able

to resolve lot of financial problems but do not focuses to solve the causes of this problem. Of course other

measures were disposed in the restructuring plan like a new organization for the 1400 employees and the

formation of an internal audit. In the end this state aid stated also the reduction of the grant to Abbanoa in

driving water supply from 23 to 20 years, after which the service shall be offered in a market tender.

3.3 Quality and sustainability issues

The climate of citizens dissatisfaction is only one of the main problems of Abbanoa. For example, municipalities have found several times without water-service, so families were forced to organize

themselves with the installation of tanks in homes to meet the need of water supply, supporting higher costs

Recently there were problems of potable water, putting in alarm several municipalities in Cagliari and

hinterland. Even though the Enas (Water Authority of Sardinia) had warned Abbanoa about maintenance

16

Case SA.35205 (2013/N) Italy: Restructuring aid to Abbanoa S.p.A http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_35205

suppliers41%

other investors19%

Public entities17%

banks14%

others 9%

Debts Composition

activities that would have affected the Lake Mulargia, Abbanoa has not behaved in consumer protection. So,

citizens were not informed about the occurrence of the inefficiency of purification water, but especially Enas

communication had the purpose of allowing Abbanoa to modify the plant layout and to choose the most

suitable treatment process to manage the variation of the water quality. Even in the Middle Campidano

occurred problems of water purification. In fact, due to a high concentration of algae in the water purifying

Santu Miali in Sanluri, countries around Sanluri could not yet have potable water, waiting for a maintenance

intervention by managers.

This shows a very inefficient administration, with the result that users continue to fuel their distrust of the

services provided by Abbanoa. Users, now tired of paying for a low-quality service, often organize protests

outside offices of Abbanoa.

This type of complaints were fomented by the delivery at the users homes of bills for a bailment which, according to the company, would need to cover possible defaults. Even if managers justified this decision by

asserting that deposits are already provided by other operators like in the field of telephony, electricity and

gas, the Consumers' Association opposes. In fact, they believe this request illegitimate because in contrast to

the Service Charter of 200717

, not updated with the new regulations and neither parameterized quality of

service.

Certainly with a picture like this, the final consumer can only be dissatisfied and dis-heartened. Indeed

seasoned to receiving bills with fixed amounts, is also often forced to require to Abbanoa recalculation of the

bills on actual consumption. Indeed, skills of the resources of the company seems to be inadequate.

However, it would that the company is moving in this direction, starting the selection of highly qualified

administrative staff (it is possible to see these in competitions published last month).

Therefore, Abbanoa should intervene with a certain priority in the maintenance of infrastructure, because the

networks of aqueducts consist of old hydraulic lines, involving a great loss of water. The unaccounted for

water of Sardinia (43%)18

is above the national average (31.9%) and other European countries such as

Germany (6.5%), England and Wales (15.5%), France (20.9%)19

, considering the threshold of acceptable

unaccounted for water is around 5%.

Managers should conduct a promptly staff-reorganization to deal with all the problems that characterize the

water service in Sardinia, in order to offer a high quality service for a good of primary importance, which is

water.

In summary, it must be stated that Abbanoa was born under an Area Plan flawed by:

poor reliability of the infrastructures recognition;

failure to cover the risk factors;

water demand over-sizing;

delays and cuts in public funding;

inability to counter delinquency and theft of water;

delays review of the PdA;

failure to apply the method of National Tariffs;

lack of transparency in relations between authorities and shareholders managers.

The action of reorganization of water service (begun to overcome the fragmentation of responsibilities

between the previous managers, ensuring a uniform tariff and solidarity, ensure improved service levels and

increasingly high standards of quality) instead has led to pay lowest high in exchange services and treatments

17

The Service Charter is an operational tool introduced by the Directive of the Presidency of the Council of Ministers 18

ISRI (Institute of Industrial Relations) Operational Program of the Autonomous Region of Sardinia in 2000 - 2006. Updating the

mid-term evaluation (October 2008). 19

Publishing group Espresso SpA (May 24, 2014).

in continuous net decay. Tariff increase, it is not so far paid a service that meets the needs of consumers in

terms of relations with users, waiting times for essential services, the reading procedure on the field and

sending of invoices for billing of water services, response times to requests submitted by municipalities and

by users.

It is said, for example, have already made a detailed investigation to reconstruct the loads of the town of

Quartu but in fact the billing is still for many utilities for over five years (there are many users who would

pay for the service but fail to do so due to inefficiency of the company).

From the data provided by ABBANOA that the current situation of the water service is slightly worse than

that described by the area plan with 120 million cubic meters sold compared to 300 million cubic meters

processed.

It 'also minimal, does not exceed 18%, the share of interventions. These projects, financed with public funds

made available in various capacities by RAS, for over 542 M , between 2004, 2005 and 2006, were strategic as aimed at containing and recovering the huge losses of water networks that generate deficits

financial non-sale of the goods and services for which they have been developed either production costs for

the purchase, drinking water, water supply, and that could have given positive effects from the first years of

the life of society.

The management of public investment has been paralyzed from the offices nonexistent equipped to follow

them. The engineering office was abolished and depleted of all professionalism. The procurement office has

few employees in relation to the large workload that must support.

The organization generally is compartmentalized with centralization of decision-making power and

dispossessing both branch office is the leadership.

Organizational processes are still not fit to ensure ready answers can effectively address the problems with

timing compatible to the needs of an enterprise of modern design. If Abbanoa will not change its strategic

planning, will inevitably lose the trust not only of consumers Sardinians, but also of Europe.

Conclusions.

Water is an essential resource for life which can be defined as a common good: its supply and management

must be such to assure right to access and its quality is fundamental for health and development of a country.

European countries have different tradition on management provisions, with a general trend of public

provisions since 1930. The first need for re-privatization of the sector rose in the 90s, to inject both

investment and efficiency into the sector.

The EU is currently implicitly encouraging liberalization, through State aid and financial restriction

provisions, bailout programmes for financially distressed MS, stressing on the high annual turnover of the

sector and imposing full-cost recovery principle.

But the results of 25 years of full privatization in England and Whales, and of old France concessions

system, are not showing the expected benefits: after an excursus on the evidences of EU most common mode

of water services provision, we can conclude neither full nor long-term privatization are able to lead to a

broader competition in the sector, rather to a concentration in the European market of few big companies

(smaller companies are normally in house of local authorities), show a trend of becoming multi-utilities

while acquiring a dominant position in different markets around Europe and the world.

Lack of investments and short term view are not automatically solved, as to please shareholders private

companies may seek to increase short term profits and avoid investing in long term projects. Moreover,

private suppliers aim to make a profit and hence, they will invest only where they expect to make a profit.

Therefore, the poorest clients are inevitably neglected, with consequences on universal right to access and

equality issues, as on public health, high need for costly control systems and for laws such as in UK to

reduce cut-offs of large poor consumers in basic services.

Authors agree that as only competition for the market is possible for a natural monopoly, this must be

ensured by frequently re-offering the tender of the service to the market. In this sense then, short

concessions seems more advisable than long-terms ones, which showed to lead to exploitation of consumers

through higher prices, to concentration (as the France case), and to need higher costs of regulations. Still,

short term PPP may have another negative aspect, which is that investments duty still relay on public

governments. Evidences on IPPPs, or mixed-companies, instead, are discordant, but some authors and

protests point out that they might inglobe the worst of each model, which is, for profit monopolization

(higher tariffs), together with political rent extraction and influence.

There is not a perfect management mode, still public non-for-profit management showed to be still the most

common and advisable way to provide such a special service, ensuring universal right, lower tariffs, better

control on quality and environmental issues, and political pressure to expand coverage. Some of its inherent

problems, such as political interference and short view, might instead be solved by an improved transparence

and citizens participation, as in the case of the city of Cordoba (with representatives of unions and social

movements on the board of directors) and Grenoble (where some civil society organizations are included in

the companies board, with a formal and open process of consultation was instituted), and a better separation

between ownership and administration. As well, can be assumed decentralized public-management to be

generally preferable (although centralized public-water in Austria didnt show any deterioration). This thesis

seem to be confirmed by the strong trend towards re-municipalisation of water (and other public local)

services, all over Europe, lead by France and Hungary.

So, why is Abbanoa, a publicly-owned company, delivering such disastrous results?

First of all, the merge of municipal companies was deleterious for numerous reasons: the first more general

one is related with better citizens-control and manageability of smaller public operators. The second is

strictly related to political interference and lack of managerial ability, as in the company converged all the

employees of former municipal companies (1500,without the necessary administrative skills but representing

58.7 millions of labour costs), and were conferred old machineries with no real economic value and

ruinous pipelines (with up to 85% of water losses). In addition, the ownership and control was now

dispersed, with 130 municipalities owning the 85% of the shares, complicating the control and monitoring of

the company.

So: the un-backed conferrals originated a gap between subscribed capital and real equities (and high costs of

disposal and restoration), which created a first financial hole and was reflected in higher tariffs; meanwhile

dispersed ownership and low monitoring allowed a decrease in the quality of the service, which together with

administrative inefficiency due to bad employee competition in selection, flared-up costumers dissatisfaction

and worsened paying propensity and debt collection.

As analyzed, the State Aid permissions granted by the EC in 2013 to save the company from bankruptcy,

solved only some of its problems, raising the quote of shares of the Sardinian Regional Government up to

51%, allowing a better control and to cover the financial impasse, but requiring the liberalization of the

service in 2025. The other partial solution that has been adopted is the public selection for highly qualified

administratives. The Commission declared that the provisions will be sufficient to allow Abbanoa to regain

What can be pointed out by this analysis is that typical public-management distortions (such as rent-seeking

behavior, political interest, administrative and economic inefficiencies and clientelism) may increase with

bigger organizations, and that extended monitoring processes and instruments should be advisable, such as

the presence of citizens representatives in the board, to supervise each sensible moment, from inception, to

employment selection, to tariffs provision and investment decisions.

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Web-sites:

Abbanoa web site

Abbanoa Balance sheet ( 2013 )

Official web site European Union

Official web site Regione Sardegna