Nou cas de Remunicipalització Aigua – Budapest (Hungria)

Posted on 20 de febrer de 2014 per

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Hungary
Population: 1,740,000, Area (km2): 252

At the end of May 2012, the Budapest City Assembly approved the purchase of the minority stake of the Waterworks of Budapest and management rights, ending the current contract before its legal termination date in 2022. The Waterworks of Budapest company has become a property that is practically 100 per cent owned by local governments. Budapest Capital City Municipality has a crucial interest in almost 99 per cent of shares and wants to manage the water works operations directly.

Background

Waterworks of Budapest has been a company limited by shares since 1 January 1994. It was privatized in 1997. From that time until 29 June 2012, there were two main shareholders: the Budapest City Council (73.6 per cent) and Hungáriavíz Zrt (23.65 per cent) owned by SUEZ Environnement S.A. and RWE Aqua GmbH. Management rights were also given to minority shareowners as professional investors. Among the smaller shareholders were a few local governments in the conurbation area (1.04 per cent). The contracts included a 25-year term to operate the Water Works, in which the City of Budapest remained the majority shareholder.

SUEZ Environnement and RWE signed an agreement with the city for the city’s repurchase of their stake in the Budapest Water Works. At the end of May 2012, the Budapest City Assembly approved the purchase of the minority stake of the Waterworks of Budapest, as well as the termination of the Syndicate and Management Agreement concluded in 1997, ending the contract before its legal termination date in 2022. The city paid EUR 51 million to get minority shares plus control of 100 per cent of the company. It also got rid of the obligation to pay about EUR 100 million during the further contract period as a management fee to the investors, according to the original privatization agreement. Thus, in accordance with the Termination and Settlement Agreement signed in June 2012, the company has become a property practically owned 100 per cent by local governments.

According to the investors, they substantially improved the level of services offered to Budapest’s residents. They provided people with water management and service quality that conforms to European standards at rates below those charged in Hungary, despite investments to renovate most of the city’s water distribution equipment. In contrast, the city opposes this view for several reasons. From its perspective, the motivation to buy out was, firstly, the lack of sufficient influence on the operation as a whole. Secondly, according to the city’s new leadership, the management fee was too high and was guaranteed to the investor groups based on the original contract year by year. Thirdly, the tariff increase was criticised because the rate was above inflation and relatively high compared to the average in developed countries. In negotiations on re-municipalisation, a direct pretext was also raised; that is, the company might have committed an offence related to fire defence and the maintenance of hydrant in public areas.

Key actors
In 2010, conservatives won the elections getting a two-thirds majority either in Parliament or in the City Assembly. They argued that private companies had abused their dominant position to overcharge for their services and the conservatives wanted to buy back their shares. According to the new mayor, EUR 100 million would be was extracted from the Waterworks of Budapest company for management fees in total till the end of contract. It meant several millions Euros on a yearly basis.
Negotiations took place between the city and the foreign investors. At the same time, the laws on public services in water management were also changed. The new rules put pressure on service providers to transform their activities and clarify their legal position with regard to the core assets (the networks) in the water works. (Formerly core assets ought to have remained as the property of municipalities, however particular legal rules were not implemented perfectly and these assets were privatised.) An opportunity had been established with the recent obligation to transform the owners’ position relative to the water services providers.

Apart from the roles of the city and investors, the legal context at national level of the whole process is also very important. The economic and regulatory environment of public service provision in water supply is changing in Hungary, forcing the transformation of most of the service providers in the sector.

Current water management model
In the course of 2012, following the Termination and Settlement Agreement with the foreign investors, the ownership of Waterworks of Budapest structure changed. Budapest City Council’s share increased to 78.02 per cent, the Waterworks of Budapest, by purchasing own shares, has 20.94 per cent of the shares, meanwhile the shares of five local governments in the conurbation area remains unchanged (1.04 per cent)
Core assets (pipelines, etc.) are municipal property. Taking ownership used to be implemented in an unsatisfactory way, but the process is now clarified by laws. This has had a positive influence on the activity of the company. On the other hand, in the long term, Waterworks of Budapest’s operation will be impacted by the loan repayment obligations. According to an official communication of the City Government, it is compensated by the fact that the commitment to pay several millions in management fees on a yearly basis will not further burden of the company.

New acts on water service provision also clarify that new utilities have become the property of municipalities or the state. Meanwhile, a management right can be transferred to private companies to operate services.

Financing
The purchase of the shares is planned to be done with credit that the company will pay back. However, the banks believe the risk is too high and they are reluctant to participate in any agreement. Finally, the city has to pay the bill, expecting a longer-term recovery from the profit of the Waterworks of Budapest company.
Maintenance costs are covered by user charges, however, tariffs are defined by Parliament and the government. As far as working capital investments are concerned, because the company is fully owned by the city, national and European Union grants were more easily available because no further guarantee was needed for keeping the new utilities in public hands.

The central government, in general, is very active in making rules in the economic environment of public utility service provision in Hungary. From 2010, several measures were undertaken to centralise profits from the water sector. Providers are now burdened with a central tax levied on public utility networks. A general cut in prices of user charges is required and a new supervisory fee has been introduced for the administrative regulatory authority. Additionally, municipal water utilities were exempted from local taxes. It is no longer the case and financial burden is for municipal water utilities heavier.

Status
In the re-municipalisation process, the legislation at national level is very important. The aim of the national government seems to be to shift public utilities (including water) to non-profit-making services. In this case, the role of municipalities has not yet been specified, nor has the presumable providers’ counter-interest.

Resources
On the current system: http://vizmuvek.hu/en/company_information

http://www.suez-emvironment.fr

Historical background:

Pallai, K. (ed.) (2003). The Budapest Model: A Liberal Urban Policy Experiment. Budapest: OSI/LGI.

Hegedűs, J., Papp, M. and Péteri, G. (2010). Hungary: New stage of private sector participation. Institutional and regulatory setting of water provision. In: Les enjeux de la gestion locale de l’eau. GRALE. Paris: Éditions du Moniteur.

Font: Water Remunicipalization Tracker

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