Water Rate Concession in Russian Regions

Water Rate Concession in Russian Regions

Photo: https://geobur.ru/

Water supply is a strategically crucial part of urban life support. Unfortunately, water is remembered only when it disappears. As the wear and tear of pipes and equipment are remarkably high and some sections have not been repaired for 60-70 years, it is very understandable why it disappears from time to time.

It is hard to imagine how much water goes into the ground instead of flowing from consumers' taps.

Concession

That goes without saying that water supply and sewerage systems in an urban environment need regular maintenance and repair. When there is no possibility to maintain worn-out utilities at the expense of the budget or to build new ones, the state attracts private investors for these purposes and transfer municipal facilities for management. This form of public-private partnership is called “concession.”

Concession makes it possible to combine the efforts of the state and business in replacing old infrastructure facilities with new ones even in the construction of entirely new facilities. In 2005, the Federal Law “On Concession Agreements” was adopted to regulate this mechanism. According to experts, it has become one of the most elaborated, since it clearly defines the duties and responsibilities of each party.

This law requires observance of public transparency. In other words, every citizen can get acquainted with the text of the document and, most importantly, with the list of measures that the investor is obliged to realize within the framework of the concession agreement. Therefore, such cooperation is one of the most efficient ways of implementation of practically every large-scale and socially important project.

VEB.RF State Corporation together with the shareholders of Rosvodokanal is a concessionaire in the sector of water supply and water disposal. Rosvodokanal Group is the leading Russian operator of centralized water supply and sanitation systems, operating 17,300 km of networks based on long lease and concession.

Lipetsk

Next year Rosvodokanal Group plans to take the Lipetsk Vodokanal into concession. More than 51% of water supply networks and almost 69% of water disposal networks are completely worn out there. In December 2021, the authorities are waiting for the concession project from the company. The agreement will be concluded in the first quarter of 2022.

Chances are Rosvodokanal Group will take control of the asset for 49 years until 2070. During this time it is planned to build and reconstruct 421 km of water supply networks and 298 km of sewage networks. The project also includes the reconstruction of sewage treatment plants worth 2.5 billion rubles ($33.91 mln) that belong to the Lipetsk Aeration Station municipal unitary enterprise.

The Lipetsk authorities explain the need for concession by the lack of the company's funds for the renewal of the municipal infrastructure. In 2021, Lipetsk City Energy Company invested about 80 million rubles ($1.1 mln) in the water supply system but only 3.1 km of networks were repaired. Repair and modernization of 3.2 km of sewage networks cost about 48 million rubles ($650,976).

Vadim Negrobov, the Vice-Mayor of Lipetsk, described the state of the networks. More than half of 1,063 km of water supply networks are 100% deteriorated. There are 898 kilometers of sewage networks, of which 617 kilometers are 100% worn out. Most of the pipelines were laid in the middle of the last century. Due to high wear and tear, there are more than 700 pipeline ruptures per year. It is on average two ruptures per day, water losses are more than 30%. There are more than 8,000 blockages per year or 20 days on wastewater networks. Wastewater treatment plants need serious reconstruction and modern equipment.

In 2022, Rosvodokanal Group promises to invest almost 350 million rubles ($4.75 mln) in the modernization of water supply and sewage facilities. In 2023, the amount of investment will exceed 1.2 billion rubles ($16.27 mln.) The average annual growth of the rate will be 6.7%.

The authorities also note the positive effect on the budgets of the city and the region. They expect 13.8 billion rubles ($187.15 mln) in property tax payments and 2.6 billion rubles ($35.26) inland tax payments. In the case of a concession agreement, these funds can be used for the co-financing of programs of the project to curb the growth of rates below the agreed level.

Yuzhno-Sakhalinsk

While the last issues are being fixed in Lipetsk, a corresponding agreement has already been signed in Yuzhno-Sakhalinsk.

“Yuzhno-Sakhalinsk water supply and sewage capacity are transferred to the concession of 1st Water Concession Company for 49 years,” said Mayor Sergei Nadsadin. “It will be responsible not only to manage these enterprises and facilities but also to modernize them.”

We signed an investment program. They are obliged to invest 19.2 billion rubles ($260.39) at today's prices. Where does this amount come from? We have listed specific objects such as both water intakes and treatment facilities and included the repair of the existing system. In a word, a full-scale modernization of our water supply and disposal facilities.

Thus, the well-being of the citizens won't be affected by the begun works in any way. “As for the rates for the population, there will be no changes during the transition and signing. Then the rates will be changed following inflationary processes up to four percent,” Nadsadin said.

Moreover, the company has committed to equip about 30 playgrounds. All of them will be put into operation in 2022-2023. “This will be a form of social interaction and social responsibility,” Nadsadin noted.

Barnaul

As of today, Barnaul is one of the Russian cities in which the mechanisms of concession in the sphere of cold water supply and water disposal have already been launched. In March 2020, an agreement was signed between the city administration and Rosvodokanal Barnaul, under which the resource supplying organization accepted seven suburban settlements for servicing.

This document will allow attracting investments needed for the construction and modernization of networks and other facilities of the water supply and sanitation system for the next 10 years, timely scheduled repairs, and better maintenance of communal facilities.

“When we launch a public-private partnership, governors ask how it will affect the tariff. The experience of Rosvodokanal, which we have studied, is a very responsible fiscal policy, including a strict economy of resources, no losses, and even less theft. This gives us confidence that the rate will grow only reasonably and only in agreement with the authorities,” said Igor Shuvalov, chairman of VEB.RF acting as a guarantor of concession agreements and investors from the state.

This is not the first time when Barnaul Vodokanal uses concession. In March 2020, the company accepted seven suburban settlements for service, the main problem of which is a significant percentage of wear and tear of the networks.

The State Duma changes the terms of lease relations in the housing and utility sector into concession

The order of transformation of property lease contracts in heat and water supply into concession agreements might become more efficient for the attraction of investments into the housing and utilities sector. The corresponding draft law was adopted by the State Duma in the second reading at the plenary session on November 25, 2021.

The document allows transforming relations into concession ones for the long term without contests. The main condition for transformation is an increase of investments in the object of housing and communal services, as follows from the draft law. Before the third reading in the State Duma lower house of Parliament, the draft law will be submitted to the Attorney General's Office for analysis and expert evaluation to avoid unreasonable growth of tariffs. This order was given by the Chairman of the State Duma Vyacheslav Volodin.

According to him, work within the framework of concession agreements requires control and study to understand all possible risks in advance. Volodin pointed out that the conclusion of concession agreements often leads to unjustified growth of water and heating rates.

“Investments should improve our lives but not at the expense of the population,” he said.

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