Organizational and Economic Mechanism for Modernization of

Water Supply and Sewerage System

Andrey Svistunov

and Irina Terentieva

Murom Institute, Vladimir State University n.a. A.G. & N.G. Stoletovs, 23 Orlovskaya Street,

Murom, Vladimir Region, Russia

Keywords: Water Supply and Sewerage, Investment, Organizational and Economic Mechanism, Modernization,

Resource-Saving Technologies, Social and Economic Partnership.

Abstract: The article is devoted to the problem of coordinating the economic interests of the state, the population and

resource-supplying enterprises in the process of investing in the modernization of the water supply and

sewerage system. The current problems of the water supply and sewerage system have been identified. They

are high physical depreciation, exceeding 70%, and insufficient financing of the modernization of the water

supply and sewerage system by the state, municipalities and private concessionaires. These problems result

in poor quality water supplies and high utility rates. The proposed organizational and economic mechanism

for the modernization of the water supply and sewerage system provides for the investment and management

activity of the population in this process. At the same time, long-term public investments should receive state

financial support and pay off due to savings on tariffs during the period of the modernization project. This

promising form of economic cooperation is called social and economic partnership. It will provide the

necessary financing for the comprehensive modernization of the water supply and sewerage system using

advanced trenchless technologies. As a result, the quality of public services will improve and tariffs will

decrease in the interests of the social and economic development of municipalities.

1 INTRODUCTION

The water supply and sewerage system is an

important part of the communal complex and is of

strategic importance in the life of the population,

social and industrial activities of the city, region and

country.

As a consequence, the smooth and proper

functioning of these economic activities is a priority

direction of state policy.

Currently, in the field of water supply and

sewerage, there are significant problems associated

with increased accidents in the utilities, significant

losses and insufficient quality of the supplied

resource, as well as a constant increase in service

tariffs. The main reason for these problems is the high

level of deterioration of the operated water supply and

sewerage facilities, which in many regions is more

than 70% and continues to increase annually by 2-3%.

(Demin, 2010).

https://orcid.org/0000-0003-1592-5703

https://orcid.org/0000-0002-8541-9411

The share of water supply and sewerage systems

requiring replacement exceeds 44% on average

across the country, with a negative trend. The existing

treatment facilities do not provide the required degree

of wastewater treatment. Only 53% of the total

amount of wastewater discharged through the

treatment facilities is the normatively treated

wastewater. Poor quality water is a direct or indirect

cause of 80% of diseases.

Resource-saving measures with the installation of

metering devices at worn-out facilities did not

improve the quality of public services and its energy

efficiency, but they contributed to a rapid reduction in

the volume of water resource use for household

needs. (Demin, 2010).

This trend has negatively affected the financial

position of most resource-supplying enterprises, more

than 80% of which are unprofitable and practically

cannot make capital investments on their own.

Svistunov, A. and Terentieva, I.

Organizational and Economic Mechanism for Modernization of Water Supply and Sewerage System.

DOI: 10.5220/0010663700003223

In Proceedings of the 1st International Scientiﬁc Forum on Sustainable Development of Socio-economic Systems (WFSDS 2021), pages 53-58

ISBN: 978-989-758-597-5

In the current critical situation, immediate

investment is needed in the modernization of the

water supply and sewerage system, the volume of

which, according to experts from the Ministry of

Housing and Construction of Russia, is estimated at

200 billion rubles annually. The accumulated

investment deficit is 1.5 trillion rubles.

If there is insufficient state funding for water

supply and sanitation, which averages 23.36 billion

rubles a year and has significantly decreased since

2018 (more than 6.6 times), the priority direction of

public policy is to attract private investors in the field

of water supply and sanitation based on the

mechanism of concession agreements in a public-

private partnership (PPP). (Nikityuk and Timchuk,

2015).

The main advantages of utility concessions are the

reduction of budgetary costs for the maintenance of

facilities (Yalalieva, 2013), the distribution of project

risks between the state and business (Denisov, 2015),

improvement of the financial condition of “planned

unprofitable” utilities, attraction of highly qualified

specialists, preservation of the intended purpose of

the object under the terms of the concession

agreement. (Zakharova, 2012).

At the same time, some domestic scientists rightly

express the opposite point of view in their many years

of research. They note the following. Utilities are a

public good, and therefore its financial support should

be retained primarily in the state responsibilities.

(Ryakhovskaya and Tagi-zade, 2005). In their

opinion, the state should ensure the construction of

such a system of price mechanisms and tariffs so that

it can replace the system of competitive prices.

(Ryakhovskaya and Tagi-zade, 2016).

Foreign scientists also note serious problems in

the implementation of PPP projects in the field of

modernization and development of public utilities.

(Chou and Pramudawardhani, 2015). These problems

are associated with the distribution of risks between

the partners of the partnership, the lack of a

systematic analysis of the factors for the successful

implementation of projects in a particular country, the

quality of preparation of the projects themselves.

(Osei-Kyei and Chan, 2015).

.The most important problem of using

concessions in public utilities has emerged in

domestic practice. Concessions do not ensure the

provision of public services of the required quality at

acceptable rates in the public interest in conditions of

high depreciation of public facilities and insufficient

public funding. (Svistunov, Kurkina, 2019).

As a result, if something is repaired or even

modernized by the concessionaire, then it is done in a

pointwise manner, for a long time and ineffectively in

relation to payments from the population and is

accompanied by a constant increase in tariffs in order

to accumulate funds for the concessionaire to

implement the investment program.

It contradicts the goal of transferring water supply

and sewerage facilities to a concession, the essence of

which is the need to attract funds from outside the

concessionaire. As a result, an ineffective unitary

enterprise operating water supply and sewerage

facilities is replaced by an ineffective commercial

organization.

At the same time, the modernization and

reconstruction of communal facilities are carried out

mainly in an open way, which leads to an increase in

the cost and timing of capital-intensive work, the

forced destruction of road surfaces, blocking of

traffic, and a deterioration in the environmental

situation.

Meanwhile, abroad, 95% of the reconstruction of

utilities is carried out using trenchless technologies

(pipe rehabilitation) by applying protective coatings

(linings), which reduces the cost of work by 10-40%.

One of the most effective methods of trenchless

technologies is the method of pulling a polymer pipe

in the form of a flexible and stretchable polymer

sleeve inside the old pipe. This method can

significantly improve the reliability and durability of

pipes. It reduces the cross-section of the pipeline, but

at the same time it can provide energy savings of up

to 68 kWh per one linear meter of pipeline length per

year, according to expert estimates. (Orlov V. et al.,

2011).

As a result, the use of sanitation of utilities makes

it possible to achieve a reduction in tariffs for the

services provided by practically eliminating

subsequent costs for major and current repairs for a

long time and an increase in water consumption.

However, the cost of remediation increases

significantly and becomes unaffordable for most

municipalities, when concessionaires carry out

individual spot repairs with insufficient investment.

The average annual investment in the

modernization of water supply and sewerage is 88.0

billion rubles and does not allow to increase the rate

of modernization of public utility facilities (on

average 1.4% and 0.4% of the total length of water

supply and sewerage pipes) compared to the annual

growth rate their wear (on average 2-3%) and the

established replacement standard – at least 5% per

year.

Thus, the existing investment mechanism in the

utilities sector consists in attracting private investors

through concession agreements and inadequate state

WFSDS 2021 - INTERNATIONAL SCIENTIFIC FORUM ON SUSTAINABLE DEVELOPMENT OF SOCIO-ECONOMIC SYSTEMS

and municipal funding with an annual indexation of

utility tariffs, which does not cover the growth of

current costs of resource supplying enterprises. This

mechanism does not allow providing the necessary

volumes of investments in the complex resource-

saving modernization of water supply and sanitation

facilities. Insufficient volumes of investments,

directed mainly into backward technologies and

conducting spot maintenance, are accompanied by an

annual increase in the wear and tear of water supply

and sanitation facilities, which further accelerates the

rate of inflation and poses a threat to the national

security of the state.

Under these conditions, the population does not

have the official status of an investor, but in fact pays

for the repair work and the concessionaire's profit

through increasing tariffs. The public interests of the

main customer and consumer of utilities are not

sufficiently protected.

2 RESEARCH METHODOLOGY

To solve this problem, it is necessary to form a

mechanism for effective interaction between the

population, state and municipal authorities and an

economic entity - a resource-supplying enterprise for

investing in projects for the modernization of

communal facilities using advanced resource-saving

technologies in the public interest.

This investment mechanism presupposes a new

form of investment and economic interaction - social

and economic partnership (SEP).

The public interest is to improve the quality of

utilities and reduce service tariffs. That is why, in the

conditions of a centralized water supply and

sanitation system with a high level of wear and tear,

it is necessary to comprehensively modernize it while

preserving the public character of a public utility

service with a socially significant focus.

To achieve this goal, the population should

become the main customer and consumer of utilities

with the status of an official investor and, in their own

interests, invest in projects for the comprehensive

modernization of utilities together with the state and

with the possible involvement of third-party

investors, including business.

The proposed investment mechanism is based on

simple and economically sound indicators

determined for specific municipalities according to

the reporting data of local governments. Therefore, it

can be implemented in practice.

The target indicators for the functioning of the

mechanism should be the payback period of capital

investments and a phased reduction in utility tariffs in

the form of the economic effect of modernization.

Eliminating water leaks, reducing current repairs

and saving electricity during public utilities will

achieve the necessary economic effect following the

completion of a comprehensive modernization

project.

According to the requirements of a systematic

approach to the formation of the investment

mechanism, the individual goals and interests of

investors must strictly correspond to the general

strategic goal (mission) of the integration socio-

economic partnership.

This mission is to ensure uninterrupted provision

of the population and other consumers of the

municipality with high-quality and competitive water

supply and sanitation services. Managing effective

influences and structured decisions should be focused

on the criterion of optimality and constraints that

represent the interests of investors and, above all,

public interests.

That is why, in contrast to the mechanism of

concession agreements, the indicator of obtaining a

target profit should be absent in the proposed

mechanism. The targeted attraction of the required

volume of investments should be provided at the

expense of public capital investments and state

funding, but the attraction of extra-budgetary sources

is not excluded.

An integrated approach to the functioning of the

investment mechanism is focused on achieving

socially significant results and ensuring mutually

beneficial joint organizational and economic

cooperation between the state and municipalities,

resource-supplying enterprises and the population

with a priority of public interests.

3 RESEARCH RESULTS

The organizational and economic mechanism of

social and economic partnership between the state

and the population is shown in Figure 1.

The organizational and economic mechanism of

social and economic partnership must be formed

under the following conditions:

 To create an investment fund, monthly

investment payments of the population and

budgetary funds of the state and the municipality

are deposited into a special account of a resource

supplying enterprise that must perform capital-

intensive work;

 The amount of a separate investment payment

should be calculated per one payer per month

Organizational and Economic Mechanism for Modernization of Water Supply and Sewerage System

based on the economically justified amount of

investment, the population of the municipality

that consumes public services, and the planned

modernization period with an average duration of

15 years; (Svistunov, 2019);

 Budget financing should be carried out in the

form of special projects and programs for the

modernization of communal facilities. Its share

should make the individual investment payment

not burdensome for the population;

 Budgetary funds should be invested at the initial

stages of modernization, when significant one-

time investments are needed. These investments

will be directed primarily to the modernization of

pumping stations, treatment facilities and the

purchase of special equipment;

 It is possible to attract financing from private

business, which is also a consumer of utilities,

special funds of financial institutions and

development banks on a fully or partially

repayable basis;

 The amount of the investment payment must be

set separately from the utility tariffs. Due to the

high level of wear and tear of utility facilities, the

current tariffs mainly include the costs of routine

maintenance and emergency recovery work. The

annual growth of tariffs at the maximum

permissible level excludes the possibility of their

additional increase due to the inclusion of an

investment payment in the tariff;

 The formation of an individual investment

payment should be interconnected with the

establishment of tariffs for water supply and

sanitation services. The income component in the

form of profit should be excluded from the tariff.

In addition, the tariff should include an annual

reduction in the cost component as a result of the

modernization of the water supply and sewerage

system by eliminating water leaks (up to 20%),

reducing current repairs (up to 10%), saving

electricity during maintenance (by 10%);

 The annual reduction of tariffs as the

modernization of utility facilities will reduce the

payment burden for the population and will serve

as a source of return on investment and obtaining

economic effect in the planning period;

 The amount of investment should be

interconnected with a phased plan for carrying

out capital-intensive work. They should be

divided into investments required for the

modernization of water supply and sewerage

facilities (stations, structures), including for the

purchase of special equipment and motor

transport equipment, and into investments

necessary for the modernization of water supply

and sewer pipes and associated with the

elimination of technological losses, accidents

and damages;

 To control the targeted spending of investments,

it is necessary to form plans of financial flows by

years in accordance with the plan for the

modernization of the water supply and sewerage

system in the territory of a particular

municipality;

 The annual reduction of tariffs as the

modernization of utility facilities will reduce the

payment burden for the population and will serve

as a source of return on investment and obtaining

economic effect in the planning period.

Figure 1: Functioning of the organizational and economic

mechanism for the modernization of the water supply and

sewerage system.

An integrated approach to the formation of a

modernization investment fund will allow investing

in advanced trenchless technologies with a reduction

in cost and an increase in the quality of capital-

intensive work.

4 DISCUSSION

The mechanism for the formation of an individual

investment payment is fundamentally different from

the current practice of setting tariffs based on the

income approach in concessions.

Population

consumer and head

custome

The state

(municipality)

Investment fund

for the modernization

of water and sewer

pipes

for the modernization o

water supply and

sewerage facilities

Major investments

Additional

investment sources

Individual

ment

Budget

resources

Resource supply

company

Water supply and sewerage facilities

of the municipality

Public

services for

the population

Financing

Modernization

Advanced

trenchless

technolo

Improving

quality

Reduced

cost

A complex

roach

Modernization

effects

Life

support

growth

WFSDS 2021 - INTERNATIONAL SCIENTIFIC FORUM ON SUSTAINABLE DEVELOPMENT OF SOCIO-ECONOMIC SYSTEMS

Now the tariff includes the investor's profit and

the return on the invested capital. The current

approach ensures the interests of the concessionaire,

but also cannot provide the necessary volume of

investments for the implementation of

comprehensive modernization within a certain

period. As a result, tariffs for utilities are growing

annually, and the wear and tear of utilities is

constantly increasing.

Social and economic partnership (SEP) is aimed

at creating mutually beneficial economic cooperation

and effective financing of innovative activities in the

utilities sector.

Practical application of the proposed mechanism

will allow achieving the following results:

 Maintain public and socially important signs of

public service in the public interest. The

investment payment will be calculated for a

specific payback period and a specific strategic

goal to improve the quality of utilities and reduce

tariffs. Now it is not known what the population

pays for according to the established tariffs. In

fact, the population should have a clear idea of

their investments. Social and economic

partnerships will enable such rules to be

enforced.

 Provide targeted investment in resource-saving

trenchless technologies for the comprehensive

modernization of water supply and sewerage

facilities. Effective use of pipe rehabilitation will

improve the quality of utilities and reduce their

costs;

 Achieve complete restoration and renovation of

water supply and sewerage facilities in the

planning period (estimated within 15 years);

 Improve the quality of drinking water and public

services;

 Reduce tariffs and slow down the rate of inflation

that is provoked by the current monetary

government policy;

 Reduce the payment burden of the population for

utilities;

 Increase state responsibility and strengthen

control over the activities of resource-supplying

enterprises by local authorities responsible for

life support systems;

 To finance in full the economic activities of

resource-supplying enterprises both during the

modernization and after its completion due to the

full functioning of the depreciation mechanism.

As a result, municipal unitary enterprises will be

able to free themselves from the financial and

economic crisis and provide uninterrupted

quality water supply and sanitation services.

5 CONCLUSION

The research results will make it possible to develop

practical recommendations for the implementation of

the idea of economic cooperation in investing in

public utilities with a predominance of public

interests.

Thus, the population will become a customer and

an active investor in the modernization of communal

services. The mechanism of long-term public

investment should provide for state financial support

and payback of public investments due to savings on

tariffs.

The use of the organizational and economic

mechanism of investment in conjunction with the

tariff setting system will make it possible to increase

the social and economic efficiency of reforming the

communal services at the state, regional and

municipal levels.

State authorities and local governments and

specialists of resource-supplying enterprises will be

able to develop socially oriented investment projects

for the comprehensive modernization of the water

supply and sewerage system. These projects will be

aimed at improving the quality of public services and

reducing tariffs in the interests of social and economic

development of municipalities.

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WFSDS 2021 - INTERNATIONAL SCIENTIFIC FORUM ON SUSTAINABLE DEVELOPMENT OF SOCIO-ECONOMIC SYSTEMS