D11: Watertime Case Study - Arezzo, Italy

D11: WaterTime case study - Arezzo, Italy

Emanuele Lobina

Senior Research Fellow, PSIRU, BusinessSchool, University of Greenwich

4thMarch 2005

One of 29 WaterTime case studies on decision-making on water systems

Table of Contents

Acknowledgements

1Introduction

2City background

3Water and wastewater undertaking

3.1Background

3.2Water and wastewater undertaking profile

3.3System profile

3.4Region profile

4Actors in water and wastewater services provision and production

5Episodes

5.1Decision to award a semi-privatised concession: 1990-1999

5.1.1Failure to implement decision in favour of public sector option, 1990-1995

5.1.2From rejection of the public sector option to the award of the semi-private concession: 1995-1999

5.1.3The tendering procedure and concession award

5.2Decision to renegotiate the semi-privatised concession: 1999-2004

5.2.1A troubled start for the semi-private operator: 1999-2001

5.2.2The first renegotiation of the concession agreement

5.2.3Court rulings on the validity of the concession award

5.2.4The second renegotiation of the concession agreement: 2001-2003

6Participation and Sustainability in Decision-making

6.1Public participation in Arezzo

6.2Sustainability

6.2.1Sustainability of Final Outcome for Episode 1

6.2.2Sustainability of Final Outcome for Episode 2

7City in Time

8Conclusions and discussion of findings

References

Notes

Acknowledgements

The author wishes to acknowledge the financial support of the European Commission and would like to thank the following for making the time to be interviewed and providing documents and other material:

• Pierre Andrade, Managing Director, Nuove Acque S.p.A.
• Luca Berti, Responsabile Unità Organizzativa, Historical Archives,Municipality of Arezzo
• Enzo Bianchi, Responsabile servizio tecnico manutentivo, Municipality of Arezzo
• Vincenzo Ceccarelli, President, Province of Arezzo
• Alberto Ciolfi, President, Coingas S.p.A.
• Franco Dringoli, Secretary, Federconsumatori Arezzo
• Renato Drusiani, Director General, Federgasacqua
• Franco Gallori, Settore Tutela Acque Interne e Costiere,Servizi Idrici, Dipartimento generale delle politiche territoriali e ambientali, Region Tuscany
• Luigi Falasconi, Il Ghiozzo
• Marisa Grilli, FNLE-CGIL Arezzo
• Gennaro Evangelista, President,Federconsumatori Arezzo
• Luigi Lucherini, Mayor, Municipality of Arezzo (June 1999 to date)
• Giovanni Mancini, Technical Director (1997-2001) and Director (2001 to date), Ufficio tecnico,Autorità di Ambito Territoriale Ottimale n° 4 “Alto Valdarno”
• Stefano Mencucci, Forum Sociale Arezzo
• Paola Pancini, Servizio Ambiente, Municipality of Arezzo
• Paolo Ricci, President, Nuove Acque S.p.A. and former Mayor, Municipality of Arezzo (May 1995-June 1999)
• Roberto Romizi, Coordinator, Centro Francesco Redi
• Mario Daniele Rossi, Director, Ufficio Controllo di Gestione, Organizzazione e Partecipazioni, Municipality of Arezzo
• Carlo Schiatti, former President, Autorità di Ambito Territoriale Ottimale n° 4 “Alto Valdarno” (March 1996-October 2003)
• Enrico Valentini, President, Legambiente Arezzo

Unless otherwise stated, the views expressed in this report are those of the author and do not necessarily reflect the views of the European Commission, nor any of the listed stakeholders.

1Introduction

The Watertime research project relies on the analysis of 29 case studies, one of which is on Arezzo, Italy. These case studies are expected to identify the dynamics of decision making on the reform of urban water supply and sanitation systems by providing information on the interaction between a range of PESTE factors (including factors at political and institutional, economic, social, technical and environmental levels), and the parties and processes involved.

Arezzo is the first example of application of the 1994 Galli Law, thus representing the most mature example of implementation of the reform, which provided for the restructuring of water operations at a supra-municipal level, and allowing for observation of the implications of decisions made. Local authorities have decided to award a water supply and sanitation concession for the whole ATO 4 Alto Valdarno to a public-private joint venture, where the minority partner is a private consortium led by French water multinational Ondeo. The experience in Arezzo has been controversial from many points of view, for example in terms of the transparency of the decision making process, the efficiency of operations, costs borne by consumers, disappointing service quality and investment levels, continuous conflicts between the operator and the regulatory agency, with associated transaction costs and a paradoxical ambiguity in the position of local authorities. This has been perceived by other local authorities in Italy as a cause of concern, inducing them to take a more cautious approach and contributing to the delay in the implementation of the Galli Law observed at national level. Furthermore, experience with water reform in Arezzo appears to confirm many of the problems experienced in Europe with PSP (Private Sector Participation) in Europe, including the difficulty to introduce appreciable competition in the water sector, local authorities’ difficulty to manage the relationship with the private operator - perceived by the served population as distant and indifferent to local requirements, shielded by the contractual framework from responding to the local community’s calls for a more socially oriented approach in performing operations – and the long term effects of decisions to enter PPPs extremely costly to exit from irrespective of the problems experienced in practice (path dependency). Finally, there have been problems with introducing public participation, either in terms of the initial absence of public participation mechanisms and the successive difficulty to introduce meaningful forms of public participation (or even transparency) despite the problems encountered with the semi-private concession.

2City background

Arezzo is a town of over 90,000 inhabitants in eastern Tuscany, Italy.

3Water and wastewater undertaking

3.1Background

This section lays out a short introduction to the context of the case study water and wastewater undertaking, the role of the municipalities as well as a brief historical background of water and wastewater services in the city. It also includes information on the ownership, operational management responsibility and administrative structure of the water and wastewater services.

3.2Water and wastewater undertaking profile

The below table provides data on Nuove Acque, the semi-privatised water supply and sanitation operator serving the city of Arezzo. It should be noted that Nuove Acque operates in a concession area that is broader than the city of Arezzo, although Arezzo is the largest urban centre. For details on the concession area served by Nuove Acque, see section 3.4 Region Profile below.

Leakage from the water supply network in the commune of Arezzo prior to the 1999 semi-privatisation was estimated at 25.9%[1].

DATA / CONCEPT
Undertaking identification / Nuove Acque S.p.A.
Geographical scope / ATO 4 “Alto Valdarno”, Tuscany
Type of activity / Water supply, sewerage and wastewater treatment
Type of assets ownership / Public
Type of operations / Mixed (under private management)
Total personnel (no) / 190 (as of 31st December 2003)[2]
Average annual investment (EUR/a) / € 9,978,700 per year[3]
Tariffs (EUR/m) / € 1.33/m3(excluding VAT; data as of 30 June 2003, based on 200m3of yearly consumption)[4]

3.3System profile

The length of the water supply network in the municipality of Arezzo is Km 490, while the sewerage network is Km 270 long. The total length of the water supply and sewerage pipeline networks in the 37 communes of ATO 4 “Alto Valdarno” (see section 3.4 Region Profile below) is, respectively, Km 1,946.9 and Km 1,120.5 (all data as of 1997[5]).

As of 2003, the municipality of Arezzo was served by 4 wastewater treatment plants: the Casolino wastewater treatment plant, with a capacity of 90,000 population equivalent, which became operational in 1981 (originally, the plant had a capacity of 60,000 population equivalent and was upgraded between November 1996 and January 1999); the Quarata wastewater treatment plant, with a capacity of 2,000 population equivalent, which became operational in 1988; the Ponte a Chiani treatment plant, with a capacity of 23,000 population equivalent (of which 15,000 relate to the commune of Arezzo and the remaining 8,000 to the commune of Civitella della Chiana), which became operational in 1993; and the Ponte alla Chiassa treatment plant, with a capacity of 3,500 population equivalent, which became operational in 1994 (Comune di Arezzo, 2004: p. 61).

3.4Region profile[*]

The municipality of Arezzo is part of the concession area ATO 4 “Alto Valdarno” in eastern Tuscany, defined pursuant to the Galli Law. This means that Nuove Acque serves a total population of over 296,000 over 37 communes (population data as of 1997)[6].

As of 2003, the Gross National Product per capita in the Province of Arezzo was estimated at € 20,302[7], while the Gross National Product per capita in the commune of Arezzo amounted to € 26,800[8].

4Actors in water and wastewater services provision and production

It might be interesting to note the prominent role of the municipality of Arezzo before implementation of the Galli Law and the award of the semi-private concession (in observance of national and regional law and despite the initiative of the public undertaking Coingas). After the award of the semi-private concession it appears that the commune of Arezzo assumed a secondary role in decision making process beyond the fact that decisions taken by the ATO governing body had to reflect the joint will of all the communes and not of the Arezzo municipality alone. In fact, not only has the private operator shown a remarkable resilience to municipal attempts to pursue the originally intended objectives. Eventually, the majority of communes with the notable exception of Arezzo ended up supporting the position of the private operator that crowned its persistence in interest-seeking.

5Episodes

5.1Decision to award a semi-privatised concession: 1990-1999

5.1.1Failure to implement decision in favour of public sector option, 1990-1995

As of 1990, water supply, sewerage and wastewater treatment services in the commune of Arezzo were provided by municipal departments, under direct municipal management or “gestione in economia” (see Lobina, 2005a: pp. 7-9).

In 1990, municipal elections in Arezzo saw the victory of a centre-left coalition, including the communist party PCI (which would then change name into PDS and subsequently DS), the Socialist Party and the Green Party. The new mayor, Valdo Vannucci, took office in June 1990. The major factors leading to change in organisational mode in water supply and sanitation provision under Mr. Vannucci’s administration were two. First, what would then become the Galli Law or L.n. 36/94 (see Lobina, 2005a: pp. 9-11) was being debated in the Italian Parliament in that period and operators were expecting the introduction of a reform of the water sector, leading to the integration of water supply and sanitation operations over a plurality of municipalities. Second, a number of problems associated with direct municipal management of water operations had been identified, including insufficiently sound management, lack of investment and the limited territorial scope of operations at a time where diversification of water sources became increasingly urgent[9]. The municipally-owned enterprise Coingas was active in gas distribution in 15 communes of the Arezzo Province, including the commune of Arezzo, and its strategy was to become a municipally-owned multi-utility providing gas and water services. Coingas approached the Vannucci administration putting forward its proposal to assume water supply and sanitation operations and obtained a positive response from the Arezzo mayor[10].

In December 1991, the city nominated a technical commission, composed of municipal and Coingas officials, with the task to study and prepare the transformation of Coingas into a municipally-owned “azienda speciale”, pursuant to L.n. 142/90 (see Lobina, 2005a: pp. 7-9), and the award of water supply, sewerage and wastewater treatment services to Coingas[11]. Submitted to the city executive on 30th October, 1992, the plan also discussed the merits of the various organisational modes among which local authorities could choose, as provided for by L.n. 142/90, with particular reference to “azienda speciale” and public limited company (PLC). Although “azienda speciale” was favoured as a more straightforward reform to implement as regards the transfer of municipal assets and employees to a separate undertaking[12], the plan did not rule out the eventual transformation of Coingas from “azienda speciale” to PLC[13].

The technical commission plan, approved by Arezzo city council in December 1992[14], noted that the synergies and economies which could be obtained through gas and water multi-utilities were considerable and that inter-municipal operations would enable the attraction of otherwise unattainable advanced technical and professional skills[15]. It envisaged that Coingas would have enjoyed managerial autonomy[16] and would have operated under the obligation to balance its budget (and to pursue efficiency, effectiveness and cost-effectiveness)[17], but that the tariff policy in each of the 25 communes would have been provisionally determined by the relevant municipal administration. This would allow communes for deciding whether to cover all costs through tariffs or whether to subsidise part of the operations, while the different tariff policies would then be gradually harmonised until the adoption of a unique tariff for the whole territory served by Coingas[18]. This provision would have enhanced the political and social acceptability of the merger, so that higher costs observed in some of the communes would not lead to sudden increases in communes enjoying lower costs and tariffs. The technical commission worked under the assumption that the personnel of the Arezzo municipal departments providing water supply and sanitation services would be first transferred to Coingas after the municipality of Arezzo had awarded water operations to the public undertaking. In a second phase, 24 other municipalities in the Arezzo Province would decide to award water supply and sanitation services to Coingas. In other words, the Arezzo municipality would take the leading role in awarding water services to Coingas and restructure the municipally-owned enterprise, as well as in transferring its water personnel to Coingas. The other 24 municipalities would then follow[19].

The plan elaborated by the technical commission drew on a report commissioned by Coingas to the consultancy Pubblitecnica, especially as regards economic and financial projections. The Pubblitecnica report estimated that all operating and capital costs associated with water supply would be covered by 1993 thanks to price increases up to an average tariff of ITL1,000 to ITL1,050/m3. While the wastewater tariff covered all costs, that was not the case with sewerage charges so that the municipality would have to compensate for the remainder, amounting to 20% of overall costs or ITL1 billion, with its own funds. The consultancy envisaged that budget balance would have been achieved thanks to substantial reductions in the workforce and economies resulting of synergies between gas, water and sewerage operations. More precisely, such economies were estimated at 10% to 15% of purchasing costs and 20% to 25% of maintenance costs, for a total of ITL400 million to ITL500 million. However, the technical commission rejected the 17 job cuts the consultants’ report saw as necessary and argued that the same results could have been achieved with a reduction of 10 units in the workforce. In fact, if the transfer of municipal workers to Coingas would have meant an increase in salary due to the different applicable contract, it would also imply an extension of the working week by two hours. Furthermore, relying on a relatively stronger in-house capacity base would have allowed for providing the same service levels with limited resort to outsourcing and for extending service provision from the municipality of Arezzo to the neighbouring communes without the need to acquire new personnel[20].

In October 1993, the municipality of Arezzo and Coingas called for a meeting of all the 25 mayors concerned in which the plan was discussed and approved. In November 1993, Arezzo city council approved the restructuring of Coingas and gave authority to the mayor to sign the convention elaborated by the technical commission as subsequently amended[21]. In April 1994, Tuscany’s regional Co.Re.Co. (Comitato Regionale di Controllo), a committee vested with the power to vet the legitimacy of administrative acts undertaken by local governments, annulled two specific provisions of decisions adopted by the city council in November 1993 and March 1994, while the remainder became executive[22].

In the meantime, the Italian Parliament adopted the Galli Law in January 1994. The Galli Law provided for regional regulations to integrate its provisions within each Italian region (see Lobina, 2005a: pp. 9-11). Tuscany’s regional law L.R. n. 81/1995 was approved in July 1995[23]. L.R. n. 81/1995 did not provide for local authorities to adopt a specific organisational mode, but simply left the choice open among the organisational modes allowed by national legislation, that is to say: a) direct municipal management; b) “azienda speciale”; c) PLC or limited company, majority or minority owned by local authorities; d) private concession. Although the regional law did not provide for any prescription on which of the above organisational forms had to be adopted, it appears that a choice in favour of public-private PLCs had been made by the regional structure of DS, the most powerful political party in Tuscany. This would have eventually led to the emergence of the so-called Tuscany organisational model, consisting in a public-private joint venture, majority owned by local authorities with a minority of the shares in the hands of a private operator, and its adoption not only in Arezzo but in all the 6 ATOs in the region[24].

Following municipal elections in Arezzo in April 1995, Mr. Vannucci’s mayoral mandate had terminated in May 1995. The 1995 municipal elections saw the victory of a centre-left coalition, including the post-communist party Democratici di Sinistra (DS) and the post-Christian Democrat party La Margherita. Although the DS party had since then supported the hypothesis to award water services to Coingas, the new mayor Paolo Ricci opposed such option and the DS, who were the strongest party within the new majority, changed their attitude in favour of Mr. Ricci’s preferred option[25]. More precisely, Mr. Ricci favoured the award of water services to a public-private single purpose company, rather than to a wholly municipally-owned multi-utility[26].

The restructuring of Coingas went on irrespective of the change in municipal government in Arezzo. In September 1995, Coingas became a municipally-owned “azienda speciale”. In the winter of 1995, an industrial agreement was signed providing for the transfer of workers from the municipal departments providing water supply and sanitation services to Coingas[27].

However, the new mayor blocked the above process on the grounds that the multi-utility structure of Coingas would have not ensured financial transparency as cross-subsidisation could have taken place between gas and water operations. The debate on the merits of the two options was limited to the political domain and no comparative evaluation of business plans elaborated under the two hypotheses was carried out. Mr. Ricci disapproved the idea of awarding the concession to Coingas, as its experience in the water sector was limited to a handful of minor communes in the province of Arezzo[28]. By contrast, advocates of the Coingas solution argued that this had the capacity and creditworthiness to finance the required investments in the ATO, that it enjoyed a solid reputation among local authorities and consumers as a reliable and efficient public gas distributor and that the Galli Law provided for the transfer of water workers from the previously operating municipal structures or undertaking to the new concessionaire, so that Coingas would have faced no substantial problem in terms of operational capacity or local knowledge[29]. An accountant by profession, Mr. Ricci also believed that multi-utilities, as Coingas would become was it to be awarded the water concession, were intrinsically subject to a lack of financial transparency in light of the unavoidable cross-subsidies between different activities, even if the multi-utility was structured as a holding with different subsidiaries operating a distinct service each. The only way to have full financial transparency was, according to Mr. Ricci, to award a water supply and sanitation concession to an operator selected by competitive tendering. A public-private joint venture would have ensured the private operator’s contribution in terms of expertise and ability to tap investment finance as well as local control and attention for public interest considerations[30].