Analyses and Action Plan towards Sustainable Water Services in Estonia

In June 2020 the project Analysis and Action Plan towards Sustainable Water Services in Estonia was launched. Project is funded by the Structural Reform Support Programme of the European Union.

The project consists of two phases and is expected to last 18 months.

The results of the first phase will be an analysis of possible solutions to consolidate Water Supply and Sanitation (WSS) services and accompanying measures and the results of the second phase will be an action plan together with a timetable and a communication plan.

A working group has been formed by a directive of the Minister of the Environment to evaluate water services in Estonia and to prepare an action plan for sustainable water business. The working group has 21 members (4 representatives from the Ministry of the Environment, 2 representatives from the Ministry of Finance, 5 representatives from The Association of Estonian Cities and Municipal and one representative from  Competition Authority, SA-st Environmental Investment Centre, OÜ Kohila Maja, AS Tallinna Vesi, AS Emajõe Veevärk, AS Narva Vesi, OÜ Järve Biopuhastus, OÜ Europolis, Keskkonnalahendused OÜ ja AS Infragate Eesti one representative).
The kick-off meeting of the project took place in October 2020 (output 2), and was attended by representatives of the OECD, representatives of the European Commission and members of the working group.
In November 2020, a report on the state of play was completed (output 1).
In April 2021 a Issue paper (output 3) was completed, which is a list of key issues to be addressed in the strategy and action plan.
In the next stage, the report with an analysis of possible solutions to consolidate WSS services and accompanying measures will be completed (output 4) and this paper will provide a robust and evidence-based analysis of different modalities of water utilities sector consolidation, increasing social equity in access to - and prices for - WSS services in Estonia.

The first stage is completed by a report on legal issues (output 5) and this report will explore the legal issues that relates to the preferred option for consolidation (in line with the concept note developed under output 4). The report of legal issue  includes:

  • Ownership of assets and transfer of ownership.
  • Accountability and legacy issues. This includes provisions to regulate financial liabilities created prior to consolidation.
  • Governance of utilities.
  • Contractual modalities (e.g. delegation of some functions or creation of a new regional operator) and legal forms of entities operating water infrastructure, owned by local governments.
  • Exit and entry rules for new members.
  • Oversight of performance (role of municipalities or an economic regulator).
  • The role of water users and communication mechanisms to enhance transparency of water utility performance and decision making.

In the second stage, a report on tariff regulatory framewor will be completed (output 6). Tariffs for WSS services need to reconcile environmental (water conservation), economic (efficiency), financial (stable revenues) and social (affordability) objectives.

At the end of the project, an action-oriented strategy (output 7) and an action plan together with a timetable and a communication plan will be completed (output 8). The action-oriented strategy will reflect the concept note submitted to the government. It will reiterate the main reasons why this transition is needed and is the best option in the Estonian context (The preferred scenario to transition towards a sustainable WSS sector in Estonia). This output will present accompanying measures to the transition towards the preferred option, in particular on legal issues, economic regulation and tariff policy. The action plan allocates tasks and responsibilities to a range of stakeholders in Estonia.

The final work will be available to everyone after the OECD has published it on its website.  In the meantime, Ministry of the Environment will disclose the documents completed during the intermediate stages.

There are 79 local governments in Estonia (15 cities and 64 rural municipalities) that decide and organize issues of local life independently. The data of the annual water use reports for 2019 show that there are 144 water companies in Estonia and more than one water company in 47 local governments.
Larger and urban settlements are served by local government companies and the vast majority of assets of provision of water services are owned by water companies. In some individual cases, the assets are held by private individuals and companies including companies whose main activity is not the provision of water services, but still provide a water service (e.g giving water to some settlements from their boreholes or treating wastewater in their treatment plant). In addition, there are non-profit associations that operates as water companies  and serving small units of up to 200 people.
As a result of investments made in the last decade, 87.3% of the population in Estonia is connected to the public water supply and 83% to the public sewerage system. Since 2000, nearly a billion euros have been invested in Estonian drinking and wastewater systems, mainly from the European Union, but also from the Estonian state, local governments and water companies. 70% of water infrastructure is built with subsidies. As a result of these investments, both the quality and availability of water services have significantly improved.
One of the most important strategic documents of the Estonian environmental policy is the Environmental Protection and Use Programme for 2020-2023. The programme for 2020-2023 states that a vision for the policy regarding the provision of public water supply and sewerage services will be developed in order to guarantee the sustainability of the public water supply and sewerage service and to ensure the continuity of the service in all regions. In addition, an important objective of this program is the continuous supply of drinking water to the population and the collection and treatment of waste water, all at an affordable price.
An affordability check is not a part of the tariff setting procedure in Estonia. Currently, the issue of affordability of the water tariff is solved at the level of the local government (e.g. income support etc.) by granting social support to specific people. In practice, the water tariff is less than 2.5% of the income of a household member and the price of water service for residents in 2020 was 4.02 EUR / m³ (including VAT).

@EU reforms 

In 2019, the Investment Plan of the Water Management Infrastructure was completed. As a result of the work, it became clear that over the next 12 years, approximately 1.1 billion euros must be invested in the water management infrastructure of the Estonian state. In order to maintain the compliance of wastewater collection areas with the requirements of the Urban Wastewater Directive and Drinking Water Directive and to bring into compliance those wastewater collection areas that do not currently meet, it is necessary to invest approx. 893 million euros, of which approx. 434 million euros are short-term (4 years) and approx. 459 million long-term (5-12 years) investments.

In 2018, a survey „Development of strategies towards a sustainable water sector“ was completed at the request of the Estonian Association of Water Companies, where four alternatives were proposed to address the situation:

  • 0 – Local government- based water utilities after administrative reform 
  • 1 – County-based water utilities
  • 2 – Regional water utilities 
  • 3 – Country-wide water utility

This survey concluded that rural municipality-based water business is not sustainable and only 4 counties are sustainable in county based water utilities.

So far, attempts have been made to implement a voluntary consolidation through the establishment of regional water companies.  The term regional water company was introduced in the regulations on granting support to water companies in 2018. A regional water company is a company that provides its service to more than 5,000 residents in at least six wastewater collection areas (WWCA), one of which is a WWCA of over 2,000 p.e.  Until now, getting support on more favourable conditions has been an important incentive for the formation of water companies (and the merger of smaller water companies with larger sustainable water companies). However, voluntary consolidation has not delivered the expected results. Unfortunately, the present fragmentation of water companies, where the majority are micro-companies, prevents access to the funds required for investments and the qualified workforce for maintenance of equipment while offering water services at affordable tariffs. Today, to our knowledge, only 3 to 4 water companies that serve larger cities can manage sustainably in Estonia. As 70% of the infrastructure in the water sector has been built with subsidies and no such subsidy measures will be opened in the new EU budget period, it is important to find a way to make future investments without subsidies, but at the same time without unreasonably raising the price of water services.

In order to develop the solution, the Ministry of the Environment prepared a project application in autumn 2019 “Analyses and Action Plan towards Sustainable Water Services in Estonia ” and received a positive decision. This project is funded by the Structural Reform Support Programme (SRSP) of the European Union and implemented by OECD in cooperation with the European Commission’s Directorate-General for Structural Reform Support (DG REFORM). SRSP is an programme that provides tailor-made technical  support to all EU countries for their institutional, administrative and growth-enhancing reforms. 

Last updated: 21.12.2021