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Albania ­ Water Supply and Sanitation Sector Strategy

ALBANIA ­ WATER SUPPLY AND SANITATION SECTOR STRATEGY

Final Draft

June 2003

I

ALBANIA ­ WATER SUPPLY AND SANITATION SECTOR STRATEGY TABLE OF CONTENTS 0. EXECUTIVE SUMMARY 1 Background ................................................................................................ 2 Main Issues of the Water and Sanitation Sector in Albania............................................ 3 Objectives and Main Reforms.............................................................................. 3.1 Objectives .............................................................................................. 3.2 Main Reforms......................................................................................... 3.2.1 Management Reform........................................................................... 3.2.2 Legal and Institutional Reform................................................................ 3.2.3 Financial Reform................................................................................ 3.2.4 Poverty Mitigation Reform................................................................... 3.2.5 Technical Reform............................................................................. 3.3 Short-Term Action Plan.............................................................................. 3.4 Medium-Term Action Plan........................................................................... 3.5 Targets and Indicators ................................................................................ 3.6 Costs..................................................................................................... 1. BACKGROUND .................................................................................... i ii iv iv v v v v vi vi vi vi vii vii 1 4 5 5 7 10 10 10 12 13 14 14 16 16 17 19 21 21 25 30 33 35 36 36 36 36

2. WATER SUPPLY AND SANITATION SECTOR IN ALBANIA ­ CURRENT SITUATION AND REFORM CHALLENGES ................................................. 2.1. POPULATION DISTRIBUTION, MIGRATION PROCESSES, AND POVERTY .................. 2.1.1. An overview on population and the dynamics of rural-to-urban migration 2.1.2. Income, living conditions, and poverty WATER RESOURCES AND ENVIRONMENTAL IMPACTS ..................................... 2.2.1. General issues 2.2.2. Main surface water basins and aquifers of Albania 2.2.3. Use of groundwater and surface water resources 2.2.4. Environmental conventions to which Albania is a party CURRENT CONDITIONS OF WATER AND SANITATION INFRASTRUCTURE 2.3.1. Drinking water coverage 2.3.2. Sanitation coverage 2.3.3. Drinking water demand 2.3.4. Reliability in water supply 2.3.5. Safety in water supply REGULATORY, INSTITUTIONAL, AND FINANCIAL ASPECTS OF THE SECTOR 2.4.1. A summary of the legal framework in the water sector 2.4.2. Organization and financial aspects in the water sector 2.4.3. Issues of cost accounting and tariff setting 2.4.4. Revenue collection and enforcement actions 2.4.5. Some institutional and regulatory shortcomings to be addressed ..............

2.2.

2.3.

2.4.

.........

2.5.

PRIVATE SECTOR GROWTH AND CLIMATE FOR INVESTMENTS IN WATER SUPPLY .... 2.5.1. Private sector development in Albania 2.5.2. Private sector's involvement in the water services 2.5.3. Corruption and transparency of the public administration

II

2.6.

GOVERNMENT'S POLICIES AND DEVELOPMENT STRATEGIES ............................. 2.6.1. Public sector governance and management 2.6.2. National Strategy for Socio-Economic Development (NSSED)................. 2.6.3. Policies and strategies related to the water and sanitation sector GOVERNMENT'S PUBLIC INVESTMENT PROGRAM FOR 2000­2003 ..................... 2.7.1. PIP disbursement and resource allocation 2.7.2. Medium-term expenditure framework (MTEF) 2.7.3. Government's budget for year 2003 ENVISAGED OBJECTIVES OF THE REFORM ................................................. 2.8.1. Consumer satisfaction and equity - Bridging the gap by serving the poor 2.8.2. Water resources management and environmental protection 2.8.3. Improvement of water utilities' performance DEFINING THE INSTRUMENTS FOR THE REFORM ............................................. 2.9.1. Legal and institutional reform 2.9.2. Technical reform 2.9.3. Demand management 2.9.4. Financial reform 2.9.5. Private sector participation in service provision

39 39 40 41 44 44 45 46 48 48 49 50 51 51 56 58 59 65 73 73 75 77 79 79 79 80 82 82 85 87

2.7.

2.8.

2.9.

2.10. ESTABLISHING REALISTIC STANDARDS IN DESIGN AND SERVICE PROVISION ............ 2.10.1. Customer service standards and design criteria 2.10.2. Quality standards for drinking water and effluent discharge ­ Definition of quality monitoring systems 2.10.3. Enforcing compliance with standards 2.11. BUILDING CAPACITIES AT GOVERNMENTAL AND OPERATIONAL LEVELS ................. 2.11.1. Enabling local governments to address reform challenges 2.11.2. Enabling water utilities to act in a business-like manner 2.11.3. Training in capacity-building and support of water professional associations 2.12. FOSTERING EFFICIENCY AND ENVIRONMENTAL SUSTAINABILITY IN THE SECTOR ...... 2.12.1. Development of water resources management plan 2.12.2. Benchmarking water utilities' performance 2.12.3. Development of a national database system

2.13. INTERVENTIONS OF DONORS AND NON-GOVERNMENTAL ORGANIZATIONS ­ DONOR COORDINATION MECHANISM .................................................................. 88 2.14. CONSULTATION PROCESS FOR THE WATER SUPPLY AND SANITATION STRATEGY....... 2.15. MAIN ISSUES OF THE WATER AND SANITATION SECTOR IN ALBANIA ................... 90 91 94 95 95 95 96 97 97 97 98

3. OBJECTIVES AND MAIN REFORMS .......................................................... 3.1. OBJECTIVES ........................................................................................ 3.2. MAIN REFORMS ................................................................................... 3.2.1. Management Reform................................................................... 3.2.2. Legal and Institutional Reform........................................................ 3.2.3. Financial Reform........................................................................ 3.2.4. Poverty Mitigation Reform............................................................ 3.2.5. Technical Reform........................................................................ SHORT-TERM ACTION PLAN.....................................................................

3.3.

III

3.4. 3.5.

MEDIUM-TERM ACTION PLAN................................................................... REFORM RISKS .................................................................................... ........................................................................................

105 110 111 123

4. ANNEXES

5. REFERENCES ......................................................................................... LIST OF FIGURES Figure 2.1.1: Figure 2.1.2: Figure 2.2.1: Figure 2.3.1: Figure 2.4.1: Figure 2.7.1: Figure 2.7.2: Figure 2.9.1: Figure 2.10.1: Figure 2.11.1: Figure 2.12.1: Figure 2.12.2: Figure 2.13.1: Figure 2.14.1: LIST OF TABLES Table 2.1.1: Table 2.1.2: Table 2.2.1: Table 2.3.1: Table 2.3.2: Table 2.4.1: Table 2.7.1: Table 2.9.1: Table 2.9.2: Table 2.9.3: Table 2.12.1: Table 3.1.1: Population growth in the main urban centers during 1990 ­ 1999 Breakdown of the average monthly expenditure for households Characteristics of the main surface water basins of Albania Surveys in some rural areas on time and efforts spent in fetching water Comparison of some parameters of treated drinking water Depreciation rates applied by water utilities Past expenditures and projections for year 2003 Expenditure for the water and sewerage 2001-2003 (million Lek) Comparison of PSP options Main features of PSP options with public ownership Water utilities' performance indicators Reform priorities and areas of intervention Urban vs. rural population rate Yearly unemployment rate Use of groundwater resources during 1997 ­ 1998 Incidence of gastroenteritis in Albania Organization of the Economic Department PIP resource framework 1996 ­ 2003 PIP disbursement 2000 ­ 2003 by sector group Components of the water price The monitoring cycle Training in capacity building and actors involved Cyclic planning approach Toward sustainable solutions Donors' intervention in the water sector Main issues in the water sector and lines of responsibility

LIST OF TEXT BOXES Box 2.1.1: Box 2.9.1: Box 2.9.2: Environmental impact of urbanization The MTEF and PIP documents serve different purposes Private sector participation in the world

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ABBREVIATIONS BOO BOOT BOT CESS EC ECHO EU GDP GoA HSC ICS IMF INSTAT KESH KfW MoE MoF MoH MoLGD MoTAT MPW MTEF NEA NGO NSSED PIP PSP SI USAID WHO WRE Build-Own-Operate Build-Own-Operate-Transfer Build-Operate-Transfer Center for Economic and Social Studies European Commission European Commission Humanitarian Aid Office European Union Gross Domestic Product Government of Albania High State Control Institute for Contemporary Studies International Monetary Fund Institute of Statistics Albanian Energy Corporation Kreditanstalt für Wiederaufbau Ministry of Economy Ministry of Finance Ministry of Health Ministry of Local Government and Decentralization Ministry of Territorial Adjustment and Tourism (formerly MPW) Ministry of Public Works (renamed MoTAT) Medium Term Expenditure Framework National Environmental Agency Non-Governmental Organization National Strategy for Socio-Economic Development Public Investment Program Private Sector Participation Sanitary Inspectorate United States Agency for International Development World Health Organization Water Regulatory Entity

AVERAGE EXCHANGE RATE 1 USD = 136 Albanian Lek

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EXECUTIVE SUMMARY

1. Background Albania has abundant water resources, however, water supply in almost all urban areas is intermittent because of the dire condition of Albania's water infrastructure. Supply is provided for two to four hours per day on average, with many customers getting less or no water at all. In addition, drinking water quality is often compromised by lack of adequate treatment and disinfection facilities, and unreliable supply of chemicals. Inadequate maintenance and repair, and lack of metering and operational control, have resulted in excessive water losses, estimated to be greater than 50 percent of water production in all cities. The table below shows some of the main financial and operational indicators of four of the 54 water utilities, providing some indication of the severe situation in the water sector. The situation in most of the other utilities is similar to the four shown in the table.

Indicator/City Working Ratio Current Ratio Collection Rate (%) Staff/1000 water Connection Staff/1000 water & Sanitation Connections Non revenue water (%) Hours of Supply Customers receiving minimum of 2 hours supply per day (%) Samples complying with residual chlorine standard (5) Current Domestic Tariff USD/m3 (W&S) European Standards 0.75 >1.3 >95% 1.00 2.00 <12% 24.00 Durres 4.60 0.30 34.00 11.19 73.00 2.10 Lezhe 6.90 0.60 33.00 28.87 13.18 61.00 20.00 Fier 4.90 0.90 33.00 7.60 4.90 59.00 6.20 Saranda 6.10 0.60 33.00 12.75 63.00 1.76

100.00 99.00

38.00 56.40

95.00 5.80 0.11

88.00 28.80 0.14

45.60 21.00 0.11

0.44 - 4.44 (av. 2.53)

0.15

In general the amount of water available and the water quality is higher in urban areas compared to rural areas. The poorest segment of the population is hit the hardest; on average, its accessibility to water is lower and the cost of access is higher (in relative and absolute terms). The dilapidation of the water supply and sanitation facilities is a severe health threat and is believed to be one of the major contributing factors to increased infant mortality in Albania. The environment (rivers, wetlands, and coastal waters) is severely polluted because not a single wastewater treatment plant exists in Albania.

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2. Main Issues of the Water and Sanitation Sector in Albania Based on the analysis of the current status of Albania's Water Supply and Sanitation Sector, the following main fields for sector reform have been identified: Demand Management Demand management is identified as one of the key elements to improve water supply services in Albania and increase the revenue generation for the company. Experience shows that in areas where pipes are under pressure for 24 hours per day, water consumption goes up to 500 l/capita per day, compared to 120 l/capita per day in other European countries. Not only does this impose high operation costs on the systems, the water withdrawn by these customers increases the lack of water in other parts of the network. The most important tool in demand management is the introduction of metering accompanied by a water tariff based on the amount of water consumed, which should at least gradually reflect the true cost of the service. Other important tools for demand management are: efficient tariff collection, and disconnection of illegal and nonpaying customer. Legal and Institutional Framework From 1992 onwards, there has been a process of gradual improvement of the existing legal and institutional framework. A number of laws have been approved aiming to provide the legal basis for the decentralization of authority to local level and to restructure the water sector for a better performance. Despite important results achieved, many issues still need to be addressed: (i) the assigning of administrative service, and regulatory powers to the local governments is not completed as some bylaws are still missing; (ii) institutional structures such as the Ministry of Environment and the Sanitary Inspectorate which have important monitoring, enforcement, and regulatory role, are facing severe problems of understaffing, lack of financial resources, and difficult enforcement practices; and (iii) the important support that the Water Regulatory Committee could provide cannot fully materialize because of some deformation of its role and lack of capacity. The Statute of the water company establishes the obligations of the company, as well as the rights and duties of the Supervisory Board. The Supervisory Boards are still dominated by representatives from the Central Government, which prevents local government from taking ownership for water and sanitation services at the local level. Service agreements between the local authorities and the water companies establishing the obligations and performance criteria of the water company on one side and the rights and responsibilities of the local authorities on the other, are not in place. These service agreements are of special importance because most of the water companies in Albania are regional companies, covering several municipalities and communes. Financial sustainability of the water utilities and governmental subsidies In the last 10 years, water utilities have been struggling to cope with the system changes in Albania ­ from central planning to a liberalized market economy. Even though progress has been achieved, water utilities' performance remains poor. Most utilities cannot recover the cost of

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operations and rely considerably on subsidies from the central government. In 2002 the Government provided Lek762 million (USD5.5 million) of operational subsidies and the Government together with Donors provided investment grants and loans to the water utilities amounting to Lek6,710 million (USD48 million) or almost one percent of GDP. Most of these subsidies are not provided in a direct and transparent manner, but through arrears towards governmental institutions and state enterprises, mainly KESH, the national state-owned energy company. Lack of enforcement toward nonpaying customers, water tariffs well below cost recovery levels, massive leakage, and a widespread occurrence of illegal connections have led to this difficult financial situation for the water utilities. The revenue stream of the companies needs to be improved substantially and the subsidies from the Central Government have to be provided in a transparent manner linked to the needs and performance of the companies. The goal is to face out the Government's subsidies for operation and maintenance cost, which e.g. is targeted for the four cities under the World Bank financed Municipal Water and Wastewater Project to be achieved not later than 2007. To improve the sustainability of rural water supply, the participation of rural communities needs to be increased by following the Demand Responsive Approach. Serving the poor The existing low tariffs which do not allow the utilities to cover their operation and maintenance cost makes substantial increases in tariffs inevitable. Although water services will still remain highly affordable for the vast majority of the customers, it may become unaffordable for the extreme poor which make up less than five percent of the Albanian population. The increased tariffs accompanied by a stricter enforcement policy towards nonpaying customer should not exclude the poor from receiving improved services. To achieve this goal the Government is piloting under the Municipal Water and Wastewater Project a lifeline tariff approach with a free first consumption block to cover the minimum metabolic, hygienic and domestic requirements as defined by the WHO (20 liters per capita per day). Private Sector Participation (PSP) Introduction of private sector participation in service provision is expected to improve the management of the water utilities and thereby achieve better quality of service and higher operating efficiency. In addition, private sector participation can also provide much needed capital for infrastructure rehabilitation and extension, although the conditions in Albania have not reached a level yet where private capital could be attracted on a larger scale. The most suitable PSP option should be selected in each case and it must take into account political, legal, institutional, financial, as well as technical characteristics of the water systems. Albania has a lot of small towns which are not attractive to foreign operators because of their limited size; bundling of towns and developing a market for Albanian operators could help to overcome this obstacle. Monitoring and Benchmarking The Government of Albania lacks a reliable overview of the performance of the water supply and sanitation sector. Data is only collected on an ad hoc base, not comprehensive and seldom checked. Data collection is very much limited to urban areas which are served by regional water utilities. To stir sector reform and measure its impact on all customer, but especially on the poor, it is essential that proper monitoring and benchmarking is introduced, including monitoring the rural areas. The monitoring should include the indicators for achieving the sector's Millennium

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Development Goals and other indicators of the National Strategy for Socio-Economic Development (NSSED) as well as cross-cutting indicators from other sectors, such as health. Benchmarking of water utilities' performance is an important tool to promote competition among companies to perform better and provides local governments with a tool to judge the performance of their own company. Public Awareness and Communication Program The amount of information and awareness of the public regarding water and sanitation issues is not sufficient. Many customers still find it strange to pay for drinking water, while most have never heard of paying for wastewater treatment. There is a widespread attitude of in-house drinking water wastage and misuse for irrigation. This lack of awareness explains in part the difficulties in tariff collection and widespread illegal consumption. However, it is encouraging to see that in recent years there is a mobilization in parts of the civil society, media, and NGOs for the development of a general awareness. The media has publicized the GoA's first steps to disconnect illegal connections and indict offending consumers in the court, and has discussed the environmental impact of untreated wastewater. This has contributed to increased awareness regarding water issues. However, more needs to be done to communicate the Government's sector reform to consumers, water utilities and local governments. Investments Needs The drinking water and sewerage infrastructure in Albania is considerably aged, damaged, and inefficient. Leakage in supply systems and sewers is substantial and health risk for the population is significant. The demographic changes related to the uncontrolled rural-to-urban migration and the subsequent sharp increase of the demand for drinking water and sewage disposal services has exacerbated the already precarious situation of the water and sanitation infrastructure, which is operating at its peak capacity. The weakness in urban planning and its enforcement puts another strain on water service delivery. Widespread unlicensed borehole drilling is having an impact on the water resources and the lack of environmental enforcement is another factor contributing to increased pollution and degradation of the environment. Qualification of the technical and managerial staff The lack of well trained financial and technical personnel in the utilities has led to inefficiency in financial management and technical operation. The technical and managerial staff will have to get more exposed to training programs based on the management experience of other European water utilities.

3. OBJECTIVES AND MAIN REFORMS

3.1. OBJECTIVES The Government of Albania has applied a two-tiered approach to its Water Supply and Sanitation Strategy, which includes: a short-term priority reform and investment program, and medium-term reform and investment program to stabilize and improve water supply and sanitation services. The long term objective of the Government's Strategy for the water supply and sanitation sector is to achieve sustainable water supply and sanitation services at the EU Standards in urban and rural areas. The strategy presented in this report includes the short- and medium-term reform and

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investment program which will help Albania to reach its long-term development objectives in the water sector, which is linked with the overall objectives of Albania to join the EU. 3.2. MAIN REFORMS 3.2.1 Management Reform Demand Management: This includes a gradual approach towards universal metering and volumetric billing, combined with enforcing tariff collection and disconnection of illegal and non paying customers. Monitoring and Benchmarking: This includes the development and implementation of a monitoring and benchmarking program which comprises the creation of a Monitoring and Benchmarking office in the MoTAT, coordinate with other sectors, publication of results, and assistance to water utilities. Qualification of personnel: This includes the implementation of training programs for utility staff, local governments, supervisory boards, and staff of the Water Regulatory Commission. Capacity Building: This includes technical assistance to the General Directorate for Water Supply and Sewerage, development of commercial & business capacity in the water utilities, and support the Water Utility Association. 3.2.2 Legal and Institutional Reform Institutional reform: This includes changing the role of Government from service provider to policy maker, regulator and facilitator; supporting institutions in charge of monitoring/enforcement; strengthening and enforcement of Urban Planning; reducing unlicensed borehole drilling; creating community water associations; and establishing the Rural Water and Sanitation Agency (RWSA). The RWSA will be under the MoTAT, but governed by an independent Board. Its role will be to provide technical support and investment funds to communes and communities. Legal reform: This includes reviewing the legal framework and completion of any missing bylaws necessary to empower local authorities; changing the statute of water utilities to ensure local control over the water companies; and transferring the ownership of water utilities to municipalities and communes. Public Awareness and Communication Program: This includes creating customer relations offices in the utilities to handle complains; developing a strategy to promote environmental conservation and cost awareness; creating a public communications office in the MoTAT; and creating local consumer panels. Private Sector Participation (PSP) Reform: This includes promoting of service delivery by Albanian companies; continuing support to PSP projects with foreign service provider; and improving the legislation to facilitate private sector participation and investments in the water sector. 3.2.3 Financial Reform This includes increasing cost recovery; gradually adjustment of tariffs; introducing wastewater tariffs in all cities, improving accounting and financial management; increasing collection rates; and changing the Government's subsidy policy to a performance-based, transparent scheme.

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3.2.4 Poverty Mitigation Reform This includes providing of basic public services to the poor; providing safe water to the served population; providing affordable water supply; piloting a "minimum water for free" scheme in four cities; increasing access to water and sanitation services in neglected areas, and conducting Poverty and Social Impact Assessments related to the sector. 3.2.5 Technical Reform This includes developing medium and long term capital investment programs for urban and rural areas. Priority will be given to improvements in water supply services, which are key for mitigating health risks and economic prosperity, without neglecting the need for improved wastewater collection and treatment. Priority for investments in wastewater treatment should be given to areas where inadequate wastewater disposal is impairing Albania's tourist industry or/and where globally important biodiversity is at stake (e.g. lake Orhid). Investments for wastewater treatment should provide adequate treatment by using simple and low cost solutions, regarding both, the investment and the operation cost. The technical reform also includes the developing of new technical standards for goods and works and new design guidelines for water supply and waste water facilities. 3.3. SHORT-TERM ACTION PLAN To start the implementation of the proposed strategy and to achieve its objectives, a short-term Action Plan (2003 ­ 2006) was developed to be implemented by the Albanian authorities and water utilities with the support of the international donor community. This action plan is based on the decentralization strategy of the Government and the success of it relies not only on support from the Central Government, but also on support from the local governments. This Action Plan reflects the experience gained with the Government's Summer Action Plan which was implemented in 2002, and which included e.g., disconnection of illegal connections and collaboration with local governments. The short-Term Action Plan is also linked with the Government Program - NSSED in terms of the objectives, actions and targets to be achieved in the water and sanitation sector. The overall objectives of the short-Term Action Plan are to improve the efficiency and effectiveness of the service provision, safe access to water services, and to improve services to low income families and those without access to the services. The expected outputs are: (i) changing the role of central government from a service provider to a service regulator and facilitator, including policy making, allocation of resources to support clear sector development goals, setting of service standards, regulation and control of the monopolistic behaviors of the companies, facilitation of private sector participation, and monitoring; (ii) changing the role of the local governments so that they would become responsible for investments and operational decision-making of water and wastewater services, and (iii) stabilize and improve service delivery, including service delivery to the poor.

3.4. MEDIUM-TERM ACTION PLAN

The Government's medium-term (2007 ­ 2012) objective in the Water and Sanitation Sector is to provide access to reliable and safe drinking water to all parts of the Albanian society, including

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the poor. To achieve this objective, the Government is pursuing the following goals: (i) complete rehabilitation of the obsolete water supply and sewerage networks; (ii) extension of the services to the poor and under-served, (iii) transformation of the water utilities to self-financing entities; (iv) increase of PSP in the water sector; (v) enabling of local governments to provide safe and sustainable water and sanitation services; and (vi) introduce adequate collection and treatment of wastewater. To achieve these goals, the GoA will continue to provide funds for the water and sanitation sector, but will do so in a transparent and efficient manner. Albania has included the Millennium Development Goals in its Water Supply and Sanitation Strategy. The Millennium Development Goals for the water sector are to improve the access to safe and reliable drinking water supply and improved sanitation. Achieving these goals is considered to be a key for reducing poverty in the country. The Millennium Development Goals stand for (a) halving the proportion of people without sustainable access to safe drinking water [Target 10]; and (b) access to improved sanitation [Target 11]. Although reliable data for Albania has still to be collected, the data already available indicates that only very few urban water utilities are providing safe and sustainable access to drinking water. The Government of Albania is leading the reform process and has defined this process, including timeframe and budget needed. The Government will make necessary changes once these activities are under implementation. This will allow for realistic planning and proper monitoring. The international donor community recognizes the need to help the Government in this process. 3.5. TARGETS AND INDICATORS For both the Short- and Medium-term Action Plans, targets and indicators have been developed to measure the progress made in the reform process. These targets and indicators are related to the Millennium Development Goals (MDGs) Albania aims to achieve in the water supply and sanitation sector and the sector related targets and indicators in the National Strategy for SocioEconomic Development (NSSED). 3.6. COSTS The Strategy provides cost estimates for the actions to be undertaken to achieve the sector reform and discusses the possible sources of financing. Although financing is secured from the Government and the international Donor community for several of these actions, additional Donor funding will be solicited and coordinated by the Government.

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1. BACKGROUND A brief view of Albania's past central planning Albania had been under a central planning system from the end of the World War II until 1991. The nature of the plan was hierarchical, the links between different parts of the economic apparatus were vertical, and decisions taken at the top were transferred downward with some artificial forms of consultation. Lower levels of the hierarchy received tasks to implement the plan as orders that were obeyed regardless of the supply and demand situation. Cost-effectiveness was low within this statecontrolled economy. The water supply sector was subject to a set of central controls and counterproductive incentives. The sector was under the responsibility of the Tirana-based Ministry of Construction. All water utilities operating in the country had a severely constrained mandate. All key powers ­ tariff setting, investment planning, staffing policies, capital sourcing, billing and collection policies - were with the Ministry. Capital and operating financings were centralized. The utility was responsible for service delivery, maintenance and operations only. This set-up was marked by structural communication problems between the planners at the top and the utilities at the local level. This in turn created systemic problems of financial and human resources misallocation, and faulty planning decisions. Water resources and the development of piped water supply in Albania Albania is blessed with abundant water resources. Located in the south of Europe facing the Mediterranean Sea, its climate is characterized by hot summers and mild winters in the low land areas. Precipitation throughout the country is high. Albania's groundwater resources are plentiful and of excellent quality. In fact, in most parts of the country, raw water quality parameters are within WHO and national guidelines. For spring and groundwater water, which is the by far predominant water source, no treatment is needed except for safety chlorination. For surface water sources, such as the Bovlia reservoir in Tirana district, the first treatment plant was financed by the Italian Government a few years ago. The country currently relies entirely on groundwater for drinking purposes with the exception of the capital where about half of the water provided is treated surface water. The development of a water supply and sanitation industry in Albania cab be divided into four phases. The first phase, is dated back in the 30s, during which Italian companies constructed the first aqueducts followed by network extensions of limited coverage in the main towns of Albania. The systems availed of mountainous springs and were simple in construction. Some of these supply systems are still functioning today despite their age and insufficient maintenance. The second phase (1950-1978) was characterized by a rapid expansion of services, although predominantly in the urban areas. This period with a central planning system was characterized by some economic and industrial growth boosted by the East-European socialist countries' aid, followed later by substantial Chinese aid. Public infrastructure was improved and the quality of services was good. The development of industry created employment opportunities in urban areas and the urban population grew in response to this situation. The third phase (1978-1991) was subjective to the political `freeze' in the relations between China and Albania. This brought to an immediate halt Chinese aid and marked the beginning of the complete self-isolation of Albania in terms of foreign investments. Lack of equipment and spare parts led progressively to massive deterioration of the supply facilities and service quality all over

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the country. Budget cuts at the national level were reflected to a decline in maintenance activities. With water systems deteriorating, leakage in the distribution network grew progressively. Important results achieved through a good coverage of consumers with water meters in many urban areas were compromised as meters stopped functioning because of a lack of maintenance. Revenue collection decreased and inappropriate technical interventions were driven by political reasons rather than functional upgrading of systems. Consequently, water was supplied intermittently instead of continuously. The few new water and sewage systems built were poorly designed, constructed, and maintained. This increased the risk for drinking water contamination and for spread of waterborne diseases. A combination of politically driven low water tariffs, widespread wastage by customers, insufficient allowances for operations, and deteriorating equipment had created a situation of unmotivated staff in charge of water supply systems. During the fourth phase (1992 ­ 2003) most of the water and sanitation infrastructure has reached the end of its lifetime and part of it is well beyond cost-effective repairs. Although support from the Government and aid from the international donor community has stabilized or improved the situation in some areas, in general the situation is continuing to deteriorate. This creates the immediate need for the sector reform presented in this report. Even though Albanians are fast and willing in adopting progressive changes, the heritage of decades of central planning may still find expression in some top-down decision-making. Civil society is weak, mostly because of people's attitude to expect everything to be provided and solved at governmental levels. This inhibits initiatives and public participation from below. Moreover, Albanians have created unrealistic expectations on the ease of reaching European living standards. Add to this the weakness of the Albanian institutions and it becomes evident that these unfulfilled expectations have led to frustration, which triggered several violent uprisings that have quite often reversed progress made until then. Today, Albania still suffers from the loyalty to traditional clan structures and codes, while the trust and respect for its institutions and laws is building up slowly. Financial, structural, and institutional reforms are all essential for a comprehensive development in Albania at the current stage. Although accepted politically, the implementation of the reforms are facing many difficulties, resistance and obstacles and therefore the pace of the reform is still low. The Government, through strict adherence to policies agreed with IMF, has maintained macro-economic stability, although Albania economy dependents largely on foreign assistance and remittances. Since the collapse of the financial pyramid schemes in early '97, which led to a massive outbreak of violent anarchy, serious efforts and progress were made by the Government (assisted by various donors) to reform and restructure the financial sector. In the past the Government was very much occupied with crisis management and only recently could spend more resources to develop a vision for the country. One of the key challenges Albania is facing is to strengthen public institutions. Despite high staffing levels, the institutions are week and professionalism of civil administration is limited. Corruption is widespread. The civil service reform, the decentralization reform, and the juridical system reforms are now all under implementation, but the impact on the institutions' performance has yet to be seen. Despite investments of the donors and the government, the service quality and access of the population to health services, education, etc. remains low, mainly in rural areas, where more than 55 percent of the population lives. , One of the main constrain remains the limited management capacity of the Albanian institutions. Achieving capacity-building at all levels of the society and empowerment at the local level will be the key to provide adequate services to the Albanian

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population. On a smaller scale, the most successful projects are those having active community participation at 'grass roots' level. Both, local and international NGOs have played a significant role in implementing these community-based projects. Until public institutions perform more effectively, but even beyond this time, these projects have an important role to play in social service provision to the Albanian population and in the empowering of civil society, but cannot solve the problem nation-wide. This paper documents Albania's search for a new mode of water and sanitation sector organization in the dawn of a fragile market economy and of legal and institutional adjustments. It attempts a detailed review of Albania's reform process. It analyses the decentralization process as well as management practices on the ground. Most of the attention is given to the achievements and obstacles on the way of the reform, causes and consequences of the problems and ways of enhancing the sector efficiency and sustainability.

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CHAPTER 2 WATER SUPPLY AND SANITATION SECTOR IN ALBANIA ­ CURRENT SITUATION AND REFORM CHALLENGES

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2.1 POPULATION POVERTY

DISTRIBUTION,

MIGRATION

PROCESSES

AND

2.1.1 Population distribution and the dynamics of rural-to-urban migration

During the almost half a century of the totalitarian period (1945­1990) Albania has seen several waves of internal migration, while external migration was prohibited by law. Internal migration was an orderly process carried out for political and socio-economical reasons, always planned by the state to detail where no room was left to individuals' preferences or initiatives. the period 1945-1960 was characterized by the development of some industries and infrastructure, which led to considerable movement of population from villages toward the main towns. The substantial Chinese aid in 1964-1978 was a relief for the economy. Following the political isolation of 19781990 and the total lack in foreign aid from other countries, the state was unable to generate new jobs and provide housing for the urban population, therefore the previous migration flow decreased. Meanwhile, rural population, growing at a faster rate than the urban one, exacerbated pressure on certain areas of Albania where land and other natural resources were limited. After 1990, when restrictions to population movement were lifted, another wave of migration toward cities started, this time completely uncontrolled and known as `wild urbanization'.

Figure 2.1.1: Urban vs. rural population rate

Rural

Urban

100% 80% 60% 40% 20% 0%

16

21

30

36

42.1

84

79

70

64

57.9

1923

1945

1960 Year

1990

2001

Source: INSTAT

This phenomenon has had severe impact on the already poor urban infrastructure. Tirana e.g. is likely to double in size. This creates the need for efficient development programs that will improve rural infrastructure, offer employment possibilities and provide incentives to slow down the rate of migration to more acceptable levels. The increase of urban population has brought additional pressure on services like water supply and sanitation, solid waste collection, electrical supply, public health, etc. Cities are becoming less livable due to lack of urban planning. Development master plans are missing or outdated, companies overbuilding wherever they can, occupation of many public properties by squatters occurs, which all led to increased pollution and a reduction of urban recreational areas. Legal uncertainties about private property rights add to the general uncertainty with regard to the use of urban infrastructure.

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Table 2.1.1 below, describing population growth, indicates that the main urban centers of Albania have been facing a considerable expansion due to the influx of rural populations [14]. However, it should be highlighted that census figures of 2001 do not include the population outside of municipal boundaries, in the sub-urban areas. Many people from the sub-urban areas are spending their daytime in the cities and have almost the same demand for services as urban residents. Table 2.1.1: Population growth in the main urban centers during 1990-2001

Urban center 1990 2001(1) Increase in % Tirana 206,000 352,581 71 Durres 72,000 113,465 58 Shkoder 71,000 85,798 21 Elbasan 70,000 95,554 37 Vlora 61,000 85,180 40 Fier 37,000 76,166 106 Korca 57,000 58,911 3 Berat 37,000 45,572 23 Lushnja 24,000 38,336 60 Kavaja 23,000 28,149 22 Total of above cities 658,000 979,712 49 Total growth Albania 3,273,000 3,069,275 -6 Source: The Population of Albania in 2001, pg.81, INSTAT, November 2002

Main reasons for migration to cities are related to insufficient land to support families, lack of mechanization, inefficient policies to support agricultural production and competition with products from abroad, remoteness of villages and burdensome access by road, difficult crediting from the banks, etc. Apart from economic reasons behind migration, there is also a psychological one. The cities exert a strong attraction, especially to young people and there is a distorted message served to migrants of easy city life in the context of a consumer society. However, it is important to stress that rural-to-urban migration is necessary for the development of Albania, which demands more human resources to be concentrated in urban areas. However, it is important that this process be carried out as much regulated as possible.

The 2001 Census does not count for Albanians in emigration for longer than one year. Their number is estimated at around 650,000 people worldwide.

(1)

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BOX 2.1.1: Environmental Impact of Urbanization State of the Environment Report (NEA, 1997-1998) The development of Albanian cities since 1991 has a tendency to run out of the control of planning. Consequently, the living conditions in the cities are considerably under the optimal requirements of a healthy and comfortable situation, running out of the control of municipal and administrative authorities. Some specific characteristics of this situation are: The unstable health situation of the population: Poor health is associated with difficulties of housing and quality of health services. Because of the poor environmental conditions in overpopulated areas the health situation has become unstable, especially where illegal constructions are more numerous. Economic problems: The economic difficulties of the population come from the difficulty to establish new activities, such as industry and tourism. With the transition towards market economy, formerly state-owned enterprises closed because of their low productivity and competition of imported goods. As a result, thousands of workers lost their jobs and unemployment increased considerably. This factor has a direct impact on the degradation of environment as the population density has increased considerably in some areas.

-

2.1.2 Income, living conditions, and poverty

The average Albanian family is poor and has insufficient living space. According to the INSTAT Statistical Yearbook of 2003, the average household income for urban areas is 39,318 Lek/month (330 USD/month). The National Strategy for Socio-Economic Development (NSSED) of May 2003, stated that "According to the absolute line of poverty, one fourth of the Albanian population is poor. Extreme poverty- as defined by the food line of poverty, is low. Less than five percent of the population do not meet the basic needs for food. Poverty is higher in the rural zones, with 66 per cent more poor people than in Tirana and 50 percent more than in the other urban areas". The NSSED provides the poverty coefficient for poor, which is 20.1 percent in urban and 29.6 percent in rural areas. (NSSED, pg.1, May 2003) One of the main issues regarding non-income poverty in Albania is the inequality towards basic infrastructure services. "The availability of basic infrastructure services is almost universal in the urban zones, yet much less so in rural areas. This does not mean that urban areas do not experience severe infrastructure deficiencies. The quality of infrastructure services in rural areas largely is a question of access" (NSSED, pg.1,May 2003). The Table on Indicator of Unfulfilled Basic needs shows that the unsuitable water and hygiene indicator for urban and rural is respectively 2.6 and 28.6 (NSSED, pg.2, May 2003) About 63 percent of the population has their own house. Following a privatization process started in 1992, about 95 percent of houses and apartments built by the state prior to this date were privatized. Houses provide very little comfort, especially in rural areas where 75 percent of the families do not have an indoor toilet and running water. The average living space per person is 14.6m2 [4]. In the last 12 years, the number of new houses built has increased by 35 percent. "The 2002 LSMS has managed to create a poverty profile, whose main features are: 1. Poor individuals live in large families and in young families which represent about 40 percent of the poor. The incidence of poverty among the young is above the national average. Almost half of the poor in Albania are under 21 years of age. The elderly in Tirana has one of the lowest rates of poverty, about 12 percent.

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2. The nothernmost and north eastern regions are among the poorest in the country. Almost half of the inhabitants in these regions are poor and more than one-fifth in this group lives in extreme poverty.2 3. The poor and the extremely poor have a low co-efficient of school registration, particularly high school registration.The poor benefit less from the health service. Malnutrition is more pronounced among poor children under five years of age as compared to the nonpoor, yet, this is not obvious. 4. The unemployment rate among the poor is approximately twice as high as that of the nonpoor. The incidence and severity of poverty is more frequent in the families where the head of the family is unemployed. Among poor families, the main source of income is agricultural activity and salaried employment. 5. The poor spend more than half of their budget on food (67 percent) and less on nonfood products (17 percent)." (NSSED, pg.3, May 2003) At this point, it is worthy to compare with a study done in 2001 by CESS and the World Bank in ten areas (mixed context rural and urban) of Albania. Table 2.1.2 gives the constituents of households' monthly expenditure where food has the highest share in this expenditure [36]. Table 2.1.2: Breakdown of the average monthly expenditure for households Item Food House/land rental Utilities Clothes Social Healthcare Education Transportation Other Total Amount (Lek) 9,655 4,700 3,710 1,200 1,080 1,014 1,000 986 3,976 27,321(3) Percent of total expenditure 35.3 17.2 13.6 4.4 3.9 3.8 3.7 3.6 14.6 100 Source: CESS/World Bank

Another social assessment study done in 2000 by CESS in four larger cities in Albania gives the household average monthly expenditure as 34,969 Lek (250 USD/month) and expenditure on food at 66 percent of the monthly income [6]. This study takes into consideration only urban areas and, in principle, monthly expenditure and its share on food are expected to be higher than in rural areas. Unfortunately, quantitative comparisons are very uncertain due to limited and, perhaps, very different areas chosen. The NSSED report explanied the strong correlation between poverty and unemployment in Albania, especially in rural areas. According to the standard definition of unemployment by the

2

According to LSMS results, the poverty level in the following cities: Kukes, Has, Tropoje, Diber, Malesi e Madhe, Bulqiza and Gramsh accounts for 46 percent of the nation's poor. (3) Note that INSTAT's survey in 1998 gives a family monthly income of 21,240 Lek, whereas CESS/WB survey gives a monthly expenditure of 27,321 Lek (195USD). It is difficult to explain the discrepancy, however, from 1998 to 2001 there has been an increase in the monthly income, which would reduce the gap between these figures.

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International Labour Organisation (ILO), the unemployment rate is approximately 10 percent. However, this number masks the wide unemployment in the rural areas.4 In terms of education, 48.7 percent of the unemployed has not finished an upper secondary school, while another 48.7 percent has done so. About 2.7 percent of the unemployed holds a university degree [7]. There is need for vocational training and the private schools offering such possibilities cannot keep pace with this high number of jobless people.

Figure 2.1.2: Yearly unemployement rate

20 Unemployment in % 16 12 8 4 0 1994 1995 1996 1997 1998 1999

Source: UNDP

18 15 13 12 17.7 18.2

Social protection is regarded as assistance to the most vulnerable families with very little or no income at all. Around 17 percent of all families receive social assistance with a more or less even distribution between rural and urban. Even though there are different social protection programs in Albania, it is estimated that 37 percent of the jobless people do not receive any unemployment benefit at all. Following strict guidelines from IMF and other financial institutions, Albania is performing well in macro-economic terms. Government adherence to these guidelines has become paramount. Annual growth floats around 8 percent, inflation has dropped close to zero, national currency exchange rates are stable, and the budget deficit has decreased steadily. However, this may give a false picture of the real situation, which remains difficult in terms of populations' income and purchase power.

4

The definition of unemployment according to ILO that is used in the 2002 LSMS means: adults older than 15 years old, that didn't work during the last four weeks and are willing to begin working within two weeks. But according to a second definition of LSMS the definition of unemployment also includes the helpless, the seasonally unemployed and the fired people. This unemployment rate is 15.4 percent. According to a third definition which includes persons who have worked less than 25 hours per week in the agricultural sector, the unemployment rate is 19.1 percent. LSMS provides detailed data for the distribution of unemployment by city and village based on each above mentioned definitions. According to the Ministry of Labor and Social Affairs' definition of unemployment which refers to: adults older than 16 years of age, the unemployed and job seekers who have registered in employment offices, the unemployment rate is 13 percent.

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2.2 WATER RESOURCES AND ENVIRONMENTAL IMPACTS 2.2.1 General issues

Environmental problems related to industrial pollution and poor natural resource management in Albania are considered as severe. Past decades' socioeconomic structures and policies of central planning as well as the lack of public participation have led to inefficient and wasteful industrial practices, resulting in widespread pollution of the environment. In 1993, the Environmental Strategy Study funded by the World Bank [40] identified the key environmental issues and updated the previous strategy for the development and implementation of the National Environmental Action Plan [18]. The following main problems were envisaged: Soil erosion in hillsides and in grazing areas, as well as deforestation due to uncontrolled cutting of trees for heating supplies Surface water contamination, due to lack of wastewater treatments and discharges of untreated industrial and domestic wastewater Loss of biodiversity caused by lack of proper management of natural resources (parks, forests, protected areas, coastal resources, etc.) Emissions of toxic gases and particulate from power plants and industrial facilities.

A comprehensive water resources management plan is still lacking, besides some basic elements, although several initiatives have been undertaken in this respect. 2.2.2 Main surface water basins and aquifers of Albania The hydrographic basin of Albania has a total area of 43,305 km2 from which only 28,748 km2, or 67 percent are within the Albanian borders. The overall renewable resources amount to 41.7 BCM or 13,300 cubic meter per capita, of which about 65 percent are generated within Albania and the remaining from upstream countries. Resources are unevenly distributed throughout the country. The major water resource is surface water, and is found in rivers, lakes, and lagoons. The most important rivers are Drini, Mati, Ishmi, Erzeni, Shkumbini, Semani., Vjosa and Bistrica. The country has several rivers which form the six main basins, a number of natural lakes, and a multitude of artificial ones for energy and irrigation. Lakes cover about 4 percent of the country's territory. The largest lakes are Ohrid,, Prespa and Shkodra. There are also several reservoirs totaling 5.60BCM of storage capacity, which have been built for flood protection, irrigation and production of hydropower. Some information on the most important surface water basins is provided in table 2.2.1. However, is should be noted that there is a lack of updated information due to difficulties in data collection and reporting. These difficulties arise mainly from lack of funding for observers, for calibration, maintenance of instruments, field trips, etc [2]. Such problems could be easier addressed if a reduction of the monitoring network to those stations most essential for a sound water resources management is applied.

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Table 2.2.1: Characteristics of the main surface water basins of Albania

Name of basin Drini Mati Erzeni-Ishmi Shkumbini Semani Vjosa Annual discharge volume (millions m3) 11,000 3,250 660 1,900 2,700 5,550 Average flow (m3/sec) 360 103 21 60 86 176 Specific discharge (lit/sec.km2) 24.8 40.1 28 26 16 26 Ratio Storage wettest vs. capacity driest (% of annual month flow) 5.7 25% 10 15% 9.5 none 10.8 none 14.8 none 7.3 none Source: Phare

A brief summary of main issues related to the water quality in these basins follows below [26]: Chemical analysis and quality monitoring has shown that the Drini River has good water quality with stable mineral composition and low metallic concentration. There should be no restrictions for using its water for irrigation, or other purposes. Groundwater quality is generally satisfactory in the mountainous part of the basin. Lowland areas have some problems with salt water intrusion, but this is not enough investigated. The Mati River contains high concentration of heavy metals, flowing through an important copper mining area. Since 1991, these pollutants should be in lower levels than before, due to diminished mining activities. At present, it is not fully assessed the effect in groundwater resources downstream and in coastal areas. Areas near Lezhe and Laç have high values of pH and chloride in groundwater, which indicates the presence of salt water intrusion. Reasons may be related to the excessive drawdown of the water table due to overexploitation. The rest of the basin has acceptable groundwater quality. The Erzeni and Ishmi rivers present high levels of iron, manganese, nitrates, BOD, etc. This is due to domestic and industrial discharge from densely populated areas along their beds. Groundwater quality near Fushe-Kruje and Tirana is generally acceptable; in some cases excessive concentration of iron, nitrite, nitrate, sulphate, and hardness have been observed. Part of Tirana city is supplied through extraction from this good yield aquifer. Shkumbini River presents high levels of iron, nitrites, ammonia, etc., due to some mining activities upstream. Another important source of pollution is the metallurgical industry in Elbasan, which is retained responsible for the seriously affected biodiversity in the area. Information on the river quality is not updated, while the discharge of pollutants in the water body has recently changed. Water extracted from the alluvial riverbanks is used without any significant treatment except chlorination - for human consumption in the towns of Lushnja and Rrogozhina. Odor and sulphate problems are well known, especially around Lushnja. It should be noted, however, that data on water quality derive from standard chemical analysis of the most common pollutants, while analysis of hydrocarbons, pesticides and heavy metals are scarcely performed because of insufficient analytical capacities in the only two laboratories specialized in this process. Water analysis of the Semani River show high content of oil, phenols, BOD, ammonia, etc. This pollution is caused by the oil extraction and refinery industry, as well as some

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domestic discharge of wastewater. Downstream the negative effects on the biodiversity, especially in the coastal area are immense. The groundwater in this aquifer contains high levels of ammonia. It is not clear if these levels are caused by water infiltration from the polluted river, or from the mineral composition of the soil (this area is a former swamp). The water quality in the Vjosa River is generally good, with slightly high values for hardness and chlorides in some parts. Use of this water for different purposes should not be a problem. Groundwater resources are of good quality with some presence of nitrite and nitrate around Novosela area. The cities of Fier, Vlora, Gjirokastra, and Saranda are supplied from this aquifer. Many springs are present in this basin; some of them are among the biggest in Albania. Important industrial sources of pollution are not present, so far. It is important to stress that Albania has massively used fertilizers and pesticides in agriculture, especially before 1990. Because detection of these pollutants is difficult and more advanced analytical capacities are needed, it could be the case that this kind of pollution is underestimated. 2.2.3 Use of groundwater and surface water resources Water resources are considerable in Albania. River discharge into the sea is estimated to be around 40km3/year with an annual specific discharge of 29lit/sec.km2, which is one of the highest in Europe. Groundwater resources represent about 23 percent of the total renewable resources. Groundwater sources are the main source for drinking water and they are also the major source for irrigation. Because of the geological structure of the Albanian mountains with developed karst manifestation and highly permeable gravelly aquifers in the lowland areas, groundwater resources are abundant and of good quality. Due to the ease of extraction, groundwater has often been unnecessarily used in industry and for irrigation in agriculture. The latter has become a reason of concern as 21 percent of groundwater extracted goes in inefficient irrigation practices [25]. In some areas of Albania, there is a fast depletion of groundwater resources and this disastrous trend is likely to continue in the next decade. This is often associated with increased salinity and alternated hydro-chemical balances in the aquifer, indicating brackish water intrusion [1]. Population's movement toward cities has put additional pressure on the water resources of some lowland areas, where extraction rates are increasing steadily.

Figure 2.2.1: Use of groundwater resources during 1997-1998

11.5%

Drinking water

21% 42.5%

Industrial water Water for construction Irrigation water

6.7% 18.3%

Other

Source: NEA

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Surface water is widely used in irrigation, electricity production, some industrial processes, mining, construction, etc. Water for irrigation is taken from rivers and from 626 reservoirs with a total estimated volume of 562 million m3 calculated to irrigate 154,000 hectares, which is 22 percent of total agricultural land [25]. Albania has had a relatively good irrigation network some decades ago, however, the irrigation technology used was mainly open channel flow that has resulted in massive wastage of water. Since 1990 the monitoring of water is much less frequent, and therefore, the water resource quality is not well known. Available information tells us that the surface waters are highly contaminated because of the direct discharge of urban and industrial wastewaters into surface water bodies. The quality of some rivers is above the maximum of the European Union Standards for river water quality ­ they experience a deficit in dissolved oxygen with high chemical oxygen demand (COD) and biological oxygen demand (BOD) values. 2.2.4 Environmental conventions to which Albania is a party Since 1990, the following conventions have been signed and ratified by Albania: In 1990, Albania joined by accession the Barcelona Convention "For the Protection of the Mediterranean Sea against Pollution" (Barcelona 16.02.1976). In 1991, Albania ratified the ESPOO Convention (Finland) "On Environmental Impact Assessment in a Transboundary Context." In 1992 Albania signed the convention "On the Protection and Use of Transboundary Watercourses and International Lakes," Helsinki 1992 with ratification in 1994. The convention "On Transboundary Effects of Industrial Accidents" was approved in principle in 1992 and ratified in 1994. In 1995, Albania joined by accession the Ramsar Convention (Ramsar 1971) known as "Convention on Wetlands of International Importance especially as Waterfowl Habitat." Ratification was done in 1996. In 1995, Albania signed the Bern Convention 1979 "For the Protection of Flora and Wildlife Fauna of the Natural Environment in Europe" ratified by the parliament in 1998. The Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters (Aarhus, Denmark, 1998). The Convention on Combat of Desertification 1996, ratified by Albania in 1999. Basel Convention on the Control of Transboundary Movement of Hazardous Wastes and their Destruction.

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2.3 CURRENT CONDITIONS OF WATER AND SANITATION INFRASTRUCTURE 2.3.1 Drinking water coverage The situation of water supply infrastructure in Albania is in a critical state, considering the old networks, massive leakage in all parts of the system, illegal connections, unstable supply pattern, uncontrolled rural-to-urban migration, and low maintenance due to lack of funds. The percentage of population having access to piped water supply is uncertain. Figures vary considerably, from 90 percent in urban areas to 50 percent in rural ones. This uncertainty happens because there are no clear criteria what a water-providing infrastructure should look like.. Most drinking water systems are old, corroded and provide very little, or, even no water at all to the consumers. Some complex networks have recently been divided into smaller manageable parts and their destiny, is unknown. Governmental authorities have not done a complete census of old systems and new ones, mainly due to lack of monitoring resources. Hence, accurate figures are not available and until this happens, approximations are inevitable. Drinking water infrastructure provides coverage mainly and more comprehensively to urban areas. Figures on real coverage are not updated and this is a consequence of poor record keeping. Population's uncontrolled movement creates difficulties to census processes that attempt to correlate the number of inhabitants with the service coverage provided to them. Central and local governments have been weak in their efforts to regulate population's movement and this process continues in an uncontrolled way. Despite the fact that presumably more than half of the population has access to piped water supply, the quality of service remains very poor. In average, water is available only 3-4 hours per day, with certain areas receiving water only once in three days. Industries and businesses are also suffering from unreliable water supply. Most of Albania's water infrastructure is more than three decades old. Many systems are rapidly approaching the end of their lifespan and are largely beyond cost-effective repairs. A survey of the World Bank [38] shows that the investment requirements are estimated at 170 million US$ per year, every year for the next decade (this is 4.6 percent of the 1999 GDP). There are considerable differences in terms of hours of availability ranging from one hour every two to three days, to almost 24 hours per day in some systems. In this estimation are not included urban and rural settlements where pipes have been dry for years and people hand-carry purchased water. In terms of supply pressure, less than one bar at street level seems to be a common figure, which is vigorously attacked by booster pumps everywhere installed to lift water to levels higher than two-floor buildings. Coverage in urban areas seems to have been higher during the 1980s than today. This is somewhat uncertain because, recently, urban areas' boundaries have been expanded in many cities with the inclusion of newly dwelt peri-urban areas, which are much less covered by water networks. This process has undoubtedly resulted in a decrease of urban coverage expressed either in terms of percentage of population served, or in terms of area covered. Unfortunately, there are no exact data to quantify coverage, however, the above-mentioned dynamics of these processes are widely accepted among experts. There is an urgent need to cope with this urban expansion by building/upgrading water infrastructure in poorly served peri-urban areas and reduce the gap of service provision between them and central urban areas. Recent actions in this respect have been insufficient.

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Rural coverage with drinking water services is another controversial aspect. Historically, rural areas have been granted less attention by the Government and this is quite visible in the very poor level of service provided. In the early 1980s, there has been a political campaign known as `drinking water action.' It consisted of expanding piped water supply in some rural areas. This action, poorly planned, insufficiently funded, and hurriedly organized brought marginal results in terms of coverage and quality of service. Achievements were more politically highlighted than reasonably accepted. Without neglecting some positive impact, this action brought only temporary results that faded away. Where piped systems are not available, population in rural areas mostly relies on natural springs and domestic wells to satisfy their needs. This implies enormous time and efforts spent in fetching and transporting water as the sources may be far away and because not every family has a well. Transportation is done mainly with animals, in plastic containers that are used for transport and storage as well. This work is primarily women's and children's responsibility. Accurate data on this process are not available, however, two international NGOs have done basic surveys in rural areas where piped systems were absent [27], [33]. Table 2.3.1 provides main findings:

Table 2.3.1: Surveys in some rural areas on time and efforts spent in fetching water

Facts Families fetching water outdoors (in summer) Families fetching water outdoors (rest of the year) Average distance traveled per day Number of trips per day Time spent daily for fetching water (incl. queue) Average water quantity transported per trip Average daily consumption per family Liters/capita a day Source: NGO's fieldwork data Plan Intl. 84% ? 3.6 km 4.4 trips 3-4 hours 45 lit(*) 198 lit (*) 39.6 l/c/d (*) Solidarités 80% 25% 3 km (*) 3.38 trips 4-5 hours (*) 48 lit 162 lit 32.4 l/c/d

Presently, rural water supply systems remain in desperate need of improvement, even though many of them are well beyond cost-effective repairs and more painstaking interventions should be considered. With regard to service providers, there are currently 54 water supply enterprises in Albania. Water consumption is divided between 75 percent for domestic users and for 25 percent nondomestic ones. Unaccounted-for-water, according to official data is around 60 percent of all water produced. About 30 percent of water production is billed and of this about 62 percent is paid for. This equates to about 18 percent of total water production being actually paid for [22]. Water losses are due to the precarious state of water infrastructure, which is old and in need of repairs, lack of adequate metering, illegal connections, exorbitant demand from uncontrolled urbanization, etc. Moreover, water companies are not in the situation to reduce unaccounted-forwater mainly because of poor revenue collection, or governmental under-funding. The Ministry of Territorial Adjustment and Tourism reports that only 8 out of 54 water enterprises are able to show a positive financial balance [22].

(*)

Figures showing a (*) mark were extrapolated from other data, thus, should be cautiously considered.

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2.3.2 Sanitation coverage Sanitation is more beset with problems than drinking water. Sanitation coverage in urban areas is almost the same as drinking water coverage, while in rural areas only a small portion of the areas with piped water supply are also equipped with sewer networks. Historically, sanitation has been overlooked in terms of funding, human resources, maintenance, etc. Upgrade of sewer networks has not kept pace with the general development of infrastructure and materials and technology used has not seen any improvement. Urban areas have mostly combined sewage and storm water collection networks that discharge into nearby surface water bodies. Sewers, generally underdimensioned, are clogged in many parts causing wastewater seepage out of the networks, thus, resulting in cross-contamination with drinking water5. Many manhole covers are missing and this has resulted in filling of these shafts with refuse material. Rural areas have mostly individual household wastewater collection systems, principally simple pit-latrines with no drainage pipes. Villagers themselves are responsible for the construction of latrines and they do it without following appropriate technical criteria, thus, their problematic functioning is quite common. Presently, there is no wastewater treatment plant in Albania and discharge in water bodies, especially in the proximity of coastal tourist areas and delicate eco-systems is becoming a reason of concern for the Government, the business community and environmentalist alike. . Foreign donors have funded studies to provide feasible and sustainable solutions to minimize the environmental impact of wastewater discharge in the Ohrid Lake. This project aims at increasing the legal and logistical basis for its conservation, through the development of a sound environmental management strategy of lakes and monitoring of their water quality [25]. KFW has agreed to support financially the construction of wastewater treatment facilities in Kavaja and Pogradec. In addition the government is preparing currently a GEF and EIB funded project for the construction of constructed treatment wetland with World Bank assistance in the cities of Durres, Lezhe and Saranda. . 2.3.3 Drinking water demand Last decade's developments in Albania have brought many changes in the water demand pattern. Urban areas are growing fast and more drinking water is needed, while most industries ­ large water consumers before 1990 ­ are not working anymore. New industries and businesses are getting active; demand for water not only is growing steadily, but also its distribution over certain areas and its time pattern has changed. Because water produced is generally not metered and because there are no measurements in distribution networks, accurate studies on demand pattern are not available. Coverage with water meters was substantial some decades ago, especially in urban areas. Meters were Albanian made and relatively accurate for a limited number of years, but lack of maintenance led to their total dysfunction. Today, it is estimated that the cost of installation of a water meter would range between 15 and 50. Due to the absence of proper metering, reliable data on division of demand between domestic and nondomestic consumers is available.

5

In urban areas, there has often been negligence in the building of water and sanitation infrastructure, where sewage and drinking water pipes are placed closer together than specified in technical norms. In many cases sewers have been built on top of drinking water pipes, thus, facilitating sewage intrusion in water supply systems during periods when the water supply system is not pressurized.

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Daily demand pattern in urban areas follow a three peaks' cycle of population's activities with some implication from the industry and other businesses. In rural areas, water demand depends largely on the agricultural activities and crop production cycles, while domestic consumption is much smaller. The rainfall in Albania is concentrated in winter and spring, while summer is hot and dry. Thus, most water is needed in summer, but due to insufficient rainfall, water resources are scarcer in this season. Add to this the bad practice of irrigating with drinking water and it is clear that satisfying demand with proper supply is quite a challenge. Development of tourism in coastal areas requires higher drinking water availability, especially in summer when demand is also increasing from other customers, but the insufficiency of the water provision infrastructure hampers tourist development. An example is the coastal city of Durres (second-biggest city in Albania with the biggest accommodation capacity for tourists in Albania) where water is available only once every two days for not more than a couple of hours. The situation is similar in other cities which have a lot of tourism e.g., Saranda, Vlora, and Pogradec. If the availability of water at the source is expressed in liters per capita in urban areas, it is surprising to find that sources of supply are more than enough to satisfy water demand. In many cities, water availability at the source is around 500 liter per capita per day and in some cases even more. Because of leakage and considerable wastage, only a small part of the water produced goes into necessary consumption. A wrong opinion among some professionals involved in water supply is that problems of insufficient availability can be solved enhancing production facilities and source intake. Increasing exploitation rates would seriously affect the fragile water resource balances with future repercussions and increase the cost of water supply. Albania has a distribution problem, not a production problem. In fact, almost everywhere problems of water scarcity can be considerably mitigated through metering, leakage detection and reduction, network improvements, disconnection of illegal connections and optimization of storage and supply patterns. 2.3.4 Reliability in water supply

consumption6. Supply systems usually use water from natural springs, from drilled boreholes, or a combination of both. Gravity systems are widespread and economical in operation and maintenance. They are common in many rural and urban settlements, in hilly and mountainous areas. Pumped systems are built where the gravity systems cannot be used. In both cases, the only treatment foreseen and generally done is safety chlorination. An exception is made for Tirana, where a more comprehensive treatment technology purifies the water from Bovilla Lake that is used for drinking purposes. Official standards used in Albania in the design and construction of waterworks date back to 1978 and are outdated in terms of design parameters, materials used, technologies, construction practices7 etc. Advanced technologies and new materials recently in use in Albania are not part of

The Italian Government financed building of a modern surface water treatment plant for Tirana that was completed in 1999 with a production capacity of 1.8 m3/sec. This is the only case of surface water used for drinking purposes. 7 Technical Conditions for Design approved by the Decision No. 38 of the Council of Ministers on May 1978. Compliance with such standards is still mandatory, even though their enforcement has been somewhat overlooked in the last decade.

6

Drinking water supply systems in Albania are generally simple in terms of construction and operation, mainly due to the good raw water quality, which does not create a need for complicated treatment. Moreover, Albania relies mostly on groundwater for drinking water supply, while treated surface water is only recently being used for large human

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these standards. Due to the lack of enforcement on the side of the institutions, compliance with standards is vaguely applied in practice. There is a `gray zone' of designing and constructing making use of foreign standards, or creating hybrids with Albanian standards. This raises concerns on the sustainability of services provided and infrastructure built. Compliance with advanced foreign standards should be encouraged with regard to selection of materials and quality of workmanship. Meanwhile, a more flexible approach should be adopted in terms of systems' dimensioning and water quantity provided. Indeed, application of European type of standards in terms of peak consumption per capita and water quality would pose a serious burden on Albania's water resources and finances ­ the cost of waterworks would not be affordable. Insufficient funding in the water sector is one of the main reasons for the poor quality of materials used. Generally, materials have been imported from East-European countries and China and their lifespan was shorter than expected. Most common materials for pipelines are steel, cast iron, ductile iron, and galvanized iron. Cement, ceramics, and asbestos-cement have been used as well. A positive factor is the use of polyethylene in water supply, which started in the second half of 1990s. Initially preferred by NGOs involved in water projects, now its use is growing also in governmental projects. There are an increasing number of private companies who are getting acquainted with this technology. Most important, there is consensus among professionals that the use of this advanced material improves performance and sustainability of water infrastructure. In terms of pumping equipment and related accessories, EU standard products are replacing the old ones, widely used until 1990. The quality of workmanship, with regard to waterworks' construction needs improvement. The attitude of professional supervision and requirements for strict compliance with standards needs to be further developed. Drinking water distribution systems in Albania, no matter whether in cities or small villages, are predominantly branch-type with unconnected ends. This creates problems of non-uniform pressure distribution. In this case, reliability of supply from another branch is very low. The Albanian capital, Tirana, has seen the construction of a ring main from Bovilla water treatment plant, which has improved distribution pattern and pressures in most of the city areas. However, given the rapid urbanization and expansion that Tirana is facing, more similar improvements are needed to optimize both, supply and distribution of drinking water. There are three main factors causing failure of supply: a) insufficient maintenance; b) illegal (unauthorized) interventions in supply systems; c) over-consumption and misuse; and d) to some extent, poor quality of materials and workmanship. Accurate data on pipe breaks and failures of supply are not available, mainly due to insufficient record keeping practices. In addition, there is no consistent monitoring of trunk mains and distribution networks by water companies' personnel. Citizens themselves report leakage and pipe bursts, but the water company can only respond to major breakdowns. Small defects are repaired after weeks and even months upon notification. There are cases of `chronic' leaks that remain in this situation for years. Water companies have limited financial possibilities to cope with ever increasing failures in the water supply networks, which adds to water losses and increases the possibility for waterborne diseases.

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2.3.5 Safety in water supply

The Council of Ministers approved in 1998 the water quality standards, which are mandatory for all service providers [28]. It is an advanced set of norms, very similar to WHO standards8. However, compliance with certain parameters is very difficult and somewhat unrealistic, as some of them are more stringent than what can be reached by the treatment technology applied in Albania9. Table 2.3.2 compares the maximal allowable concentration of some parameters used to define the drinking water quality. Standards on the quality of wastewater discharge are such that compliance becomes almost impossible due to the lack of wastewater treatment facilities. Even though the rigorous nature of standards imposes good water quality, the latter is deteriorating in trunk mains and distribution networks because of illegal taping and aging systems. The intermittent supply compromises water safety. This is confirmed by repeated events of waterborne diseases and data on their incidence. In 1994 there was an outbreak of cholera with 626 cases and 25 deaths caused by Vibrio Cholerae El Tor. National and international health institutions confirmed the waterborne spread of the disease.

Table 2.3.2: Comparison of some parameters for treated drinking water

Parameter E. coli (no./100ml) Total coliforms (no./100ml) Nitrate (mg/lit) Ammonia (mg/lit) Manganese (mg/lit) Mercury (µg/lit) Benzene (µg/lit) Radiation alpha total (Bq/lit) Albanian value (max. allowable) 0 0 50 0.05 0.05 1 1 0.1 WHO value (max. allowable) 0 0 50 0.5 0.5 1 10 0.1

Source: Albanian and WHO norms

Data from the Institute of Public Health shows a high incidence of gastroenteritis in Albania. It should be noted, however, that there is a strong attitude of under-notification among the Albanian population. This is partly because of inadequate health services, which are inaccessible, especially in remote rural areas and partly because of poor record keeping and reporting practices. Figure 2.3.1 gives the trend before and after 1990. The sharp decrease in incidence after the 1990 is not due to a miracle in drinking water safety; it rather reflects the reduction in health service coverage and a difficult information flow in reporting systems within the context of collapsing primary health care structures at the dusk of central planning, before sector reforms could be initiated. Because of a lack of appropriate epidemiological investigations, the percentage of waterborne disease of the total number of cases10 cannot be accurately determined. However, comparative studies and other investigations have led health experts to the conclusion that gastroenteritis in Albania is mostly waterborne. The bacteriological contamination of drinking water remains the predominant factor and cause of the disease.

In compiling these norms, reference to European Community Directive No. 80/778, August 1993, French standard of 1991, and Italian standard of 1988 have been taken into account. 9 In the Albanian norms, a concentration of ammonia of less than 0.05mg/l is the norm, while in Europe this figure is 0.5mg/l ­ ten times higher. 10 Some decrease in the incidence of gastroenteritis could also result from the increased security of food products, as most of these products are imported from EU countries.

8

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Figure 2.3.1: Incidence of gastroenteritis in Albania Cases/1000 inhabitants/year

40 35

Number of cases

30 25 20 15 10 5 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year

Source: IPH (internal data)

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2.4 REGULATORY, INSTITUTIONAL, AND FINANCIAL FRAMEWORK IN THE SECTOR 2.4.1 A summary of the legal framework The Albanian Parliament and the Government have approved a number of laws and resolutions to improve water/wastewater sector performance and to enable the operation of service providers, both public and private. These laws aim at providing the necessary legal basis and regulation in the sector and can be classified in three groups [11]: (a) authorization of the Juridical Person of the Water and Sewerage Enterprise; (b) standards of compliance for water and sewerage enterprises; and (c) codes of conduct for the activities of service providers. A Authorization of the Juridical Person of the Enterprise The Law No. 7582 "On State-Owned Companies", approved in 1992, represents the legal basis of the existence and activity of self-financed, state-owned companies (SOC) for service provision, production, or trade. With the exception of water utilities, an SOC is responsible of setting the price of their product/service and, in respect of bookkeeping procedures should submit an economic and financial report at least at the end of each fiscal year. The SOC is allowed to distribute the net revenue. Local authorities can decide on the separation and association of SOC, while the Supervisory Council can decide on participation in capital, staff, contracts, etc. The Law No. 7638 "On Commercial Companies", approved in 1993, is related to the Law No. 7926 "On Transformation of State-Owned Companies into Commercial Companies". Both laws define the framework for the activity of private companies and state-owned enterprises. Solicited by the Government, the majority of water enterprises have been transformed into commercial companies. Thus, a transformed enterprise is a joint stock company with all stock held by the State or a public agency. The main goal of this law was to facilitate privatization of SOCs, which were involved in activities that are typically private sector activities. Water companies were included in these laws because of the Government's desire to transform them into commercially run utilities owned by the local authorities, which would prepare some of them for management contracts, concessions, or joint stock companies. With regard to the water companies, their activity is supervised by the Supervisory Council, as per Law No.7926, dated April 20, 1995, "On Transformation of State Enterprises into Commercial Companies". The law establishes the legal basis for the creation and operation of the commercial companies with 100 percent of the shares owned by the state. Also, the Council of Ministers has approved the standard statute for commercial companies. This statute has been used for the recently transformed water commercial companies. Under the World Bank assistance the Minister of Economy has approved in March 2003, the statute of the water companies for the city of Durres, Fier, Lezhe and Saranda, which will benefit from the WB Funded Municipal Water and Wastewater project which includes a management contract. The statute gives the local governments for the first time the legal and institutional instruments to exercise its competencies in the water and sewerage service provision: (a) allows the local governments to enter into service agreements with the water companies; and (b) increases the number of the local government representatives in the Supervisory Council (SC) of the water and sewerage companies. The statute provides more decisionmaking authorities to the SC and more detailed and clear tasks and responsibilities over the management and operation of the company. However, since the owner of the shares of the water and sewerage companies is the state, the central government institutions have

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the right to occupy most of the seats in the Supervisory Council. Currently the local government units occupy only one of the three seats in some of the water and sewerage companies, as it is the case of the companies mentioned above. In some other water companies all seats in the SC are still occupied only by representatives from the Central Government. The new statute approved in March 2003 for the four water companies under the Municipal Water and Wastewater Project increases the number of seats in the SC to six, whereof two of the SC members will be nominated by the local governments. This is an important step forwards because it would allow at least the two largest municipalities in one service area to be represented in the SC. Objective of further reforms would be to establish a mechanism that would allow all municipalities and communes served by one Regional Water Company to be represented (direct or in the case of small communes indirect) on the SC and that the local governments occupying the majority of the seats on the SC. Currently the legal framework under which the water companies are operating does not allow for this. The Law No.8099, dated March 28, 1996, "On the Approval of Some Amendments to the Decree No, 163, dated November 1, 1996 on Some Amendments to the Law No. 7926, dated April 20, 1995 "On Transformation of State Enterprises in to Commercial Companies," Amended by the Decree No.1195 dated August 14, 1995 and the Law No.8099, dated March 28, 1996. Article 4 of this Law, stipulates that: "One third of the Supervisory Council members are appointed by the Ministry of Privatisation, and two thirds by the Ministries, departments, Directorates or other institutions that report directly to the Council of Ministers, as well as to the relevant bodies of the local authorities. The process of transferring the ownership rights to the local government is accelerated during the first half of 2003, and therefore soon a good number of municipalities and communes will become the owner, which should give them the full rights to control the Supervisory Council afterwards. However, to provide the local governments with the legal right to control the SC, the immediate changes of the Law No.7926 is required. The Service Agreement (2002) between the local authorities and the water companies establishes the obligations and the performance criteria of the water company on one side and the rights and responsibilities of the local authority on the other. The water company has the obligation to perform a range of tasks to ensure adequate water services to the population, while the local government has the right to exercise the supervision of the water company as defined in the laws described below. The water company will operate based on these principles: (a) commercially-oriented company; (b) independently managed by the General Director, as regulated by the Company Statute, and supervised by the Supervisory Council (as per the Law No.7926, Article 8, the company is run by the Supervisory Council and the General Director); and (c) self-sufficiency. The financial resources of the company will come from: (a) the income from fee collection; (b) local authorities' budget, if any; (c) central government's budget, if any, and (d) other income. B Standards of Compliance The laws described below strive to establish standards of compliance for water and wastewater enterprises in terms of product's quality, water resources, and environmental protection. The Law No. 7643 "On State Sanitary Inspectorate", approved in 1993 and amended in 1995 provides the legal basis for the activity of the State Sanitary Inspectorate (SSI), which is a structure under the Ministry of Health. SSI is the highest sanitary inspection

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authority that monitors the appropriateness of water quality and quantity delivered to the population. SSI carries out sampling and testing throughout Albania and decides whether service providers comply with standards approved. In case of non-compliance, the activities of a service provider may be suspended or penalties applied. Furthermore, SSI may propose to the Government application/revision of quality guidelines. The Law No. 7664 "For the protection of the environment", approved in 1993 provides the basis for the establishment of the National Environmental Agency (NEA), which was transformed in to the Ministry of Environment in 2001. This Ministry is responsible to monitor environmental situation in Albania, most importantly, the reduction and prevention of pollution in water resources, prepare new law and bylaws, approves Environmental Impact Assessments carried out by other institutions. Also, any juridical person intending to develop an activity with eventual environmental impacts should apply for a permit to , which retains the right to monitor compliance of such activities with the issued permit. The "Water Resources Law" No. 8093 approved in 1996, has defined the creation of the National Water Council (NWC) headed by the Prime Minister and of the Technical Secretariat dealing with administrative procedures. The law identifies the role of the NWC to ensure an efficient use of water resources, protection from pollution and abuse, sustainable management, as well as definition of the institutional framework at national and basin level. Hence, intake of surface or ground water for service provision to the public is not allowed without the permit of the NWC. The permits are for a defined period and can be renewed, or withdrawn. Wastewater discharge in the environment may be done only upon permit of the NWC. Presently, the regional branches of the NWC have not yet been established and practically, there is no enforcement at all applied. C Codes of Conduct The following laws define the procedures and codes of conduct for water/wastewater companies performing their business activities. The Law No. 7973 "On Concessions and Participation of the Private Sector in Public Services and Infrastructure", approved in 1995 aims at creating the legal basis for the participation of the private sector in water services' provision. The law allows concessions, management contracts, or other agreements for the purposes of water production, treatment, or distribution. Activities concerning this kind of private sector participation in water service provision may be approved by local government structures. However, due to the fact that the water utilities are still owned and controlled by the central government, local governments need the support of the central government to introduce private sector participation in the provision of water services. The Law No. 8102 "On the Regulatory Framework of the Water Supply Sector and Disposal and Processing of Wastewater", approved in 1996, the decision of the Council of Ministers No. 445 in 1998 on the appointment of commissioners to the Regulatory Agency for Water Supply and Collection and Treatment of Wastewater, as well as the decision of the Council of Ministers No. 400 on licenses and application procedures for operators and water services providers, aim at creating the basis for the establishment of the Water Regulatory Entity (WRE). Some objectives of the law are related to the protection of public interests and provision of a tariff regulation domain to enhance private investments in the water sector.

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The Resolution No. 479 of the Council of Ministers on "Liberalization of Tariffs for Drinking Water", issued in 1998 strives at liberalizing the water tariff previously set on a national level by the Council of Ministers. Hence, the water companies will calculate the cost per production unit and present it to the local government for approval before presenting it to the WRE for final approval. This law establishes local administration of water enterprises. In 1998, the Ministry of Public Works (recently the Ministry of Territorial Adjustment and Tourism) issued the Directive No. 204 for the merging of water utilities and municipal wastewater departments. Three laws were approved during period 2000­2001, the main one being the Law No. 8652 "On Organization and Functioning of Local Government." These laws establish duties, rights, and functions of the two levels of local government: municipalities and communes. Thus, the local government becomes responsible for the provision of public services, including water supply and sewerage and will have full competence for all its own functions, each one of them being composed of four authorities: administrative, investment, maintenance, and regulatory. Tariffs will be based on the principle of cost recovery under the full discretion of local government and within general national policies. Thus, a water and sewerage company will be under the jurisdiction of the local government. This change need to be reflected in the Law No 8102 on the regulatory framework because this legal ambiguity forces many companies still to go to the WRE for tariff approval. Wherever the area covered by a service will extend out of commune or municipality boundaries, additional arrangements should be done for reasons of administration and management. The Law No. 8743 "On State-Owned Real Estates", approved in 2001 gives the juridical regime of state-owned real properties and the way of administration. It also describes public rights over those public properties that have important functions beneficiary to all citizens, such as the status of water resources as national public property. The Law No. 8744 "On State Public Real Estate Property Transfers to Local Government Units," approved in 2001 regulates the process of transfer of state property assets from central to local government and defines the rights of local government on these assets [31]. The process of transfer will affect those assets that are necessary to fulfill the functions of local government, among others collection, treatment, and distribution of water and related properties used in this process. As a first step, the Central Government approves the list of the assets of the public property. The second step is for the local government to send to the Ministry of Local Government and Decentralization the list of the assets that they request to be transferred to their ownership. After discussions in the central government, the Council of the Ministers approves the public properties that will transfer to the local government units. The decisions, includes the type of assets to be transferred and limitations to their use. Then, units of Local Government will register the assets and keep them in compliance with the Law on accountability. In case of the public utility, which is transferred into the commercial entity, the CM transfers the ownership rights on the shares of the company. However, this process has been moving slowly, and recently the CM has approved the list of the assets of the water companies for 18 cities. There are uncertainties about sharing the asset ownership of a water state enterprise or ownership rights of the public water company in case of the utility is servicing more than one municipality or commune.

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Water Supply Sector Regulations. The primary purpose of the Water Regulatory Entity (WRE) is to act as the arbiter between the interests of the customer and the interests of the regulated utility, which have a monopoly position in this business. The WRE has executive, legislative and quasi-judicial functions. The WRE is in charge of issuing of licenses to commercial water utilities for the drinking water supply and sewerage services, approval of water and sewerage tariffs, promotion of the standards and regulations for the entire sector, establish monetary and administrative sanctions, and issue regulations to assist the execution of competencies and functions foreseen. The new regulatory competencies of the local government units, has commanded the need for sharing the regulatory tasks between them. One of the example is the tariff issue. The tariff approval was given to local authorities by the law on decentralization and was reaffirmed by the Inter-ministerial Committee on Decentralization on May 2002 [16]. The WRE has full rights on staff selection; it is financed by the central government at the beginning of its activity. Further funds should come through application of tariffs for licenses issued, thus, the WRE should be a stand-alone structure. The WRE is a technical structure and a juridical person composed of five members appointed by the Council of Ministers

2.4.2 Organization and financial aspects in the water sector A. General Considerations Water enterprises' structure varies according to the size of the enterprise; however, it is generally composed of a technical department, a financial department, and the department responsible for the operation and maintenance of the waterworks. Depending on the type of coverage, part of the staff of regional water companies may be employed in other administrative zones where the staff is responsible for the operation of separate small town networks or rural water supply systems. Comparing the size of water companies in Albania and the number of population served, the approximate rate of staff to beneficiaries is about 1 to 700. Weighing against West European practice (rate 1 to 2000), this is almost three times higher. This high figure could be explained by the fact that reforming and building efficiency in the water companies is far from being properly perceived and put into practice. In addition, the low level of the mechanization is another reason. Compared to European standards, the water enterprises are overstaffed at technical level, but understaffed at managerial level. Often, the general manager also holds the position of the head of the technical department. The command lines are not clearly separated for jobholders responsible for technical and financial/commercial operations of the companies; for the rural water supply operations these command lines are mixed. Furthermore, water enterprises have limited capacity for planning, design, tendering, and supervision. The financial department has difficulties with investment planning, budgeting and cost control. Finally, most water enterprises lack consumer relations' and information services departments. Nonetheless, in view of the lacking supportive environment and the deplorable financial circumstances, it should be recognized that some water enterprises manage to fulfill their obligations fairly well [5]. The two most problematic fields in water company management and operations are: Operation and maintenance: Given the budgetary constraints, the policy regarding operation and maintenance is mainly geared towards survival. Preventive maintenance is almost inexistent and all available resources are put into breakdown repairs. Water enterprises lack spare parts for operating equipment. The old pumping installations are kept operational thanks to the high commitment of the personnel. Most domestic and

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commercial meters are out of order because of little maintenance. However, directors of water enterprises realize that the knowledge of volumes of water produced and sold is of vital importance for the management of the company. · Financial procedures: The financial departments operate with a manual bookkeeping system, in conformity with the Albanian Accounting Law. The accounting policies required by the Albanian Accounting Law substantially comply with the ones required by internationally accepted accounting standards. The main differences are related to the standards for presentation. The financial statements required under Albanian standards are basically prepared by adopting a tax return approach. No statements of cash flow and statements of movements in the net equity are required. Reports and statements produced under this system include balance sheets, income statements, amount and list of debt and list of creditors, statements of source and application of funds, fixed assets depreciation (the latter is often based on historical cost price), etc. The financial departments are also responsible for billing and collection. Non-domestic consumers are billed according to agreed flat rates or metered consumption, where possible. The rural areas are not visited regularly. The consumer administration is neither well organized, nor updated. Billing and collection efficiencies are difficult to asses. The financial departments have no experience in drafting long-term investment and financing plans, annual operating budgets, systems for budget monitoring, liquidity plans and the calculation of tariffs which reflect projected cost and consumption. The financial departments need strengthening to better perform its duties.

B. Financial Situation of Water Utilities in Albania Most of the water utilities are in a negative cash flow situation where revenues are not covering operation and maintenance costs (see table 1, annex). The average working ratio of 45 water utilities was 1.67 in 2002. The main reasons are: (a) low sales to production rate (see table 7, annex); (b) low collection to billing rate (table 4, annex); (c) high unaccounted for water; (d) low management capacity; (e) low enforcement of regulations; (f) very dilapidated water supply systems; and (g) water tariffs below the cost recovery level, etc. The water losses are high, for technical (about 50 percent leakage in the system) and commercial reasons. The lack of metering provides no incentive to conserve water and results in massive wastage. The receivables of the water utilities in 2001 were Lek 1.4 billion (see table 8 annex). By the end of 2001 the outstanding arrears of all water companies towards KESH, tax administrations (VAT), oil companies and Social security Institute were about Lek 3.8 billion, of which the debts to KESH were estimated to be about Lek 2.9 billion (IMF Source). The lack of financial resources has led to deferred maintenance and investment. Under these conditions, the water utilities are very dependent on the government budget for capital and recurrent expenditures. The central funds cover part of the operation and maintenance costs of water utilities under the direct subsidy funding and indirect funding from the local government. The government policy to transform the water utilities into commercial companies aims at turning them into financially self-sufficient enterprises independent from the state budget. Hence, the Government has taken various important policy decisions such as the removal of the tariff cap, decentralization of the services, and delegation of responsibilities to the local governments. However, these policy decisions have not been accompanied with sound actions for effective and timely implementation throughout the country. The management of the newly created commercial water companies has not changed. The process of establishing new tariffs has started since 1999 and until the first half of 2003 about 30 water companies have introduced new tariffs for water supply and 18 have introduced for the first time a tariff for sewerage services. The new water

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tariffs are on average 40 percent to 100 percent higher than the previous ones, but still way below the cost recovery level. The implementation of the decentralization process is going slowly, and there are uncertainties at the municipal level about the taking-over of the service and administrative responsibilities. The process of assets' transfer to the municipalities and communes is moving slowly. However, during the first half of 2003 the CM has approved the assets inventories of 18 water utilities as a first step towards transferring of the ownership rights to the local governments, which is expected to take place during the second half of 2003. C. Sector Debts and Subsidy The sector debts are quite significant and as mentioned above most of it is to KESH. Even worse, the annual debt is increasing at a high rate. In 2000, the debts increased by Lek 794 million, or 41 percent if compared to 1999. Part of the long overdue payables are linked directly with the highaccumulated receivables, which represented in 2000 about 64 percent of the long overdue payments (see table 8 and 2, annex). A good part of the long overdue payables to KESH was due to the state's control over the water tariff that was said uniformly for all Albanian companies until 1999. Another reason is the lack of a tariff adjustment policy and a formula from the Water Regulatory Board (WRE) that should have been applied to all water utilities to adjust for inflation and cost changes, such as the increasing costs for power supply. The water sector is still benefiting from the subsidy policy of the Government reaching the amount of Lek 762 million in the central budget for 2002. The trend of the subsidy (see table 3, annex) from 1993 until 2002 is not linear. It has fluctuated based on the needs and emergency intervention to maintain a minimum level of public service provision. The Government's subsidy policy in water was expected to decline due to liberalization measures in the sector. In fact, in 2002 the approved subsidy has reached the peak since 1993. Subsidies in the water sector are provided in various forms, such as a direct subsidy from the central government budget, subsidy from the local governments' budget, and the indirect subsidy from KESH in the form of deferred payments. Another indirect subsidy is the deferred payment to the government for the Social Security Funds and for VAT. There are no data on the subsidies granted from the local governments, but annual subsidies from the central government and deferred payables to KESH range between Lek 600 million and 900 million a year. The Government's subsidy budget mainly goes to meet liquidity needs for the payroll and social security, rather than for capital expenditure. For 2003, the central Government has allocated about Lek 2 billion to pay KESH the outstanding arrears from the water sector. During the first quarter of 2003 the Central Government paid Lek500 million to KESH and the rest will be paid during the rest of the year. Also, the Government has allocated Lek756 million to the water sector for 2003 as operating cost subsidy for salary, social security and chemicals. . The above mentioned government policy decisions have had a little impact on this situation. Until 2001, the Government didn't have any policy on how to deal with debts of the water companies, particularly with the debts to KESH. The Government approach has been to write off the debts on a case-by-case. Thus, the government took a decision to write off the debts to KESH for the four water utilities in Durres, Fier, Lezhe, and Saranda; reaching the amount of Lek 1.2 billion, as a condition for private sector participation in early 2001. Currently the Government has agreed with the IMF on a program for resolving the problems of the arrears between the public enterprises. This program has started for 2003. According to international standards most of the aged receivables should have been written off, but the utilities still keep them in the balance sheet. This has created a chain of liabilities between the main public service providers. E.g. from the water utilities towards KESH and from KESH towards others.

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D Billing and Collection The billing system reflects the local conditions. The customers are divided into domestic, public, and private customers. Most consumers pay monthly, however some consumers pay every second month. Some have more than one connection, with or without a meter. Some others have shared meters. The bills are hand-delivered due to inefficient postal services and uncertainties of the address system. Each reader handles a considerable number of consumers depending on the size of the service area. The bills are often hardly readable because of lack of clarity in hand writing. In many cases, the customers do not receive the bills because of misplacements. The bill payment is time consuming for the customers, as they have to stay in rather long queues, in front of utility kiosks. The actual billing and collection process from water utilities is time-intensive, repetitive, and therefore inefficient. Late payments have to be made directly in the company's main office and even here this process is very time-consuming. All consumers pay now 20 percent VAT on top of the bill. Consumers without meters pay a flat rate. Each water utility applies different policies, but in general, the flat rate is estimated based on the cost of about 4.5 m3 of water per capita per month, equivalent to 150 liters per capita per day.. Metered consumers pay the amount based on the read consumption. Some utilities are starting to charge for meter installation. In Durres city, the utility charged an additional 200 Lek per month per family until the full recovery of the meter installation. A billing and collection system which operates accurate, correct and efficient is of great importance for the economic survival of the utilities. Unfortunately, the billing and collection in general does not ensure liquidity for the utility due to the low collection rate. Many customers feel unfairly billed and this has generated a lack of trust toward the water utility.Revenue collection for water supply is lower than for power supply, even though the water bill is about 1/10 of the electricity bill. The reason is the better enforcement recently applied for the power supply. For instance, the revenue collection for electricity was at around 60 percent by the end of 2001 (the same figure as for water), while it reached 84.6 percent in the first quarter of 2002. This happened after KESH started a massive cut-off program for non-paying customers and after that the electricity bill was established by law as an executive title and the first dozens of non-paying customers were indicted in the court. This new practice, successful for the electricity bill, has triggered many requests from directors of water companies to the GoA that the water bill be defined by law as an executive title, as well. The executive title was given to the water bill in March 2002. With regard to businesses, payment of the water bill should become a strict requirement and the local governments should make it a pre-condition before renewing the business license, which needs to be done periodically. E. Organizational Structure of the Economic Department (ED) The ED consists of a few persons depending on the utility size: (a) the director of ED; (b) the head accountant; (c) the heads of debit and sales offices; (d) the cashier/accountant; (e) the internal auditor, and (f) the storekeeper. In many cases, the qualification/education of the utility staff is not suitable for the tasks assigned. Figure 2.4.1 illustrates this set-up. In general, there are no internal regulations on job description and terms of reference for functions within the ED. The main tasks of the principal staff are: The ED Director bears the whole responsibility for the implementation of the accounting procedures, preparation of the general ledger, preparation of the quarterly and annually

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balance sheets and financial statement, compilation of the statistical evidence for the General Manager and the Supervisory Council of the company. In addition, the ED Director prepares the financial data format required by the Ministry of Territorial Adjustment and Tourism as a justification for the subsidy request, organizes the performance of the physical inventory of the stock, and the inventory control of fixed assets. He is also responsible for reconciling the monthly sales figure presented by the Sales Office with the cumulative deposits made during the month in the utility's bank account. He reports directly to the General Director and the Supervisory Council. Hence, this department is in charge of the analytical fixed assets and inventory list with acquisition time and value, as well as the itemized revenues and expense ledger. It has to be noted that neither budget nor planning, nor staff performance appraisal fall under the responsibilities of the head of the Finance Department. The Head Accountant, under the supervision of the ED Director, registers the cash and other payments as journal entries, prepares the payroll, calculates the social security payments, performs the daily registration of every accounting entry/transaction, and reports to the ED Director. The Finance Department receives cumulative monthly evidence on billing and collection from the Sales Office.

Figure 2.4.1: Organization of the Economic Department

Director of ED

Sales Office

Debit Office

Finance Office

Warehouse

F Financial Management and Financial Forecast Methodology Currently, almost all water utilities are suffering from a very poor financial management and the old fashion of centralized decision-making. Practically, there are many shortcomings in the organizational structure of the Economic Department, such as planning and financial forecasting methodology and standard, accounting system with sound policies and principles, financial reporting to executive manager and supervisory board, financial/investment decisions, poor financial analysis and unreliable data, and internal control of the inventory and auditing. There is no evidence whatsoever of procedures of the budgeting process. In addition, there is no process in place for planning and forecasting. . The ED prepares a brief quarterly progress report on the main technical and financial indicators for the general manager, this does not include any detailed analysis of key performance indicators showing the company's financial and operational activities. There is growing awareness among directors on the importance of proper planning and analysis, as well as commitment towards sales planning. 2.4.3 Issues of cost accounting and tariff setting A General Considerations

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The WRE has not issued yet formal accounting guidelines for enterprises to deal with their needs for tariff adjustment. Such guidelines should contain that kind of information that allows for a better assessment of the proposed tariff by enterprises. At present, the water utilities in Albania use the `line item' based accounting, contrary to internationally used cost-center based accounting system. The Albanian Cost Accounting System embodies several shortcomings that produce non-realistic results for the financial performance of the enterprise. According to a study of Valu Add Management, the following items are not addressed properly under the current cost accounting system [10]: Accounts receivable: Receivables that are expected to be paid to the utility within a year are normally classified as current assets. The problem with the water utility is related to the classification of receivables on balance sheets and the fact that receivables are considered similarly with the payables and not in the time period in which the payment for the amount due is expected. Nonpaying customers would be accounted for as uncollectibles. Debt service: The Albanian Accounting System allows for debt service provisions, but water utilities may not be aware that these provisions should be taken when loans have to be paid back to foreign donors. Issues such as debt service requirements, long-term debt balances outstanding, etc. should be included in annual reports of water utilities. Capital investment: Asset valuation and depreciation are considered as expedients and not always calculated in conformity with international standards. Assets are not classified and depreciation is calculated by either considering all assets belonging to the same class, or applying inappropriate classifications, which gives a distorted view of their real value. Application of tariffs and fees is a complicated matter embracing economic, political, and social considerations. The first one is: what should be covered by the tariff? This can be viewed incrementally: (a) operation and maintenance only; (b) operation and maintenance, and debt service; and (c) operation and maintenance, debt service, and capital reserve fund. Presently, the requirements for tariff setting are limited to covering operation and maintenance costs, taxes, depreciation, and a `just' profit rate. Under the actual regulation, it is not made clear how the `just' profit rate is calculated. Under the current Law on Accounting in Albania, data requirements are not sufficient to adequately analyze tariff and fee options. The approach to arrive at a tariff and fee schedule for a utility is to do a cost of service analysis, which requires data to be generated by a cost-center based system. Presently, a requirement for a uniform presentation of information from water enterprises in a statistical format designed for the water industry and those who monitor its performance is lacking. It seems suitable that the WRE develops a well defined requirement for reporting of water enterprises, in compliance with the current law. The study of Valu-Add Management [10] recommends that donor community in Albania should agree on several issues regarding cost accounting and tariff setting: Require cost-center based accounting to be the operational standard at all water supply enterprises. This will require training and commitment in computerization to allow for the type of reporting from a cost-center based system.

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Debt must be carried on the balance sheet and debt service must be shown in the operating statement of the enterprise. Loans must find their way into the operating statement and onto the balance. Capital investments must also find their way onto the balance sheet. Tariff structure should be designed in such a way that it allows for a completely selffinanced utility that is responsibly maintaining all of its operating assets. Structuring of grant/loan should be made such that the revenue generation is forecasted to meet the debt service obligation, when it is due. There are two basic methods for the calculation of tariffs: (a) tariff setting based on average cost; and (b) tariff setting that includes a norm for profit. The first one is determined based on a detailed analysis of the base cost and expected volume of billed water for the year in which tariff is proposed and applied for. The second one is defined based on a level of tariff by which all costs are covered and a just norm of return on capital investment is ensured. Thus, this tariff is calculated to allow covering operating expenses, taxes, depreciation, and a norm for profit. B Accounting and Cost Control The objectives are to comply with the legal requirements and to strengthen the control over the company with the help of efficient bookkeeping and accounting. The instruments to perform the functions are the journal for entry data/transactions, a general ledger, and subsidiary ledger regarding the billing. The results of the different tasks are the balance sheet and loss/profit statement. With few exceptions, water utilities do not have professional software for accounting and not even computers. Those having benefited from donor's assistance have computers to run the general ledger. Sub-ledgers (i.e., accounts receivable) are maintained manually. Inventory is kept manually and inventory accounting is stored in the PC system (where available) every week and/or month. Billing and collection is done manually and data are entered in the system once per month. The current accounting system is not integrated and it performs operational tasks, such as billing and collection, and inventory accounting separately. The financial statements and balance sheets are done manually according to the Albanian standard. C Accounting Policies and Reporting The accounting policies required by the Albanian accounting law differ with the internationally accepted accounting standards, especially in the standards for presentation. The financial statements required under the Albanian standards are prepared adopting a tax return approach. No statements of cash flow and statements of movements in the net equity are required. There is not any classification of ageing of accounts receivables and customers' profile according to outstanding amount and time overdue, and no policy regarding the reduction of negligent customers. With regard to reporting, the ED prepares quarterly and annual balance sheets and financial statements. The fiscal year for the annual balance sheet matches with the calendar year. The water utility submits the annual balance sheet to the Ministry of Territorial Adjustment and Tourism, Ministry of Public Economy and Privatization, General Directorate of Taxation (Ministry of Finance), Supervisory Board, and the General Manager. D. Accounting Principles

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The following principles govern the accounting process: (a) accounts are prepared under the historical cost convention and accrual basis; (b) inventories are valued at their historical acquisition cost; (c) accounts payable are stated at nominal value; (d) tangible assets are stated at historical cost minus accumulated depreciation; and (e) depreciation has been calculated on a straight-line basis of rates, which should approximate the estimated useful life. The Ministry of Finance has issued the regulation No. 3, dated April 13, 2000 on the depreciation norms, which are relatively high and affect the cost and tariffs considerably. However, a commercial company has the right to adopt its own norms within the limits issued by the MoF. The `line item' based accounting used in Albania addresses the cost situation for the whole utility by category of cost, such as salary, electricity, chemicals, etc. However, this system lacks the allocation of costs to functional areas and does not allow measuring the performance of the utility by its own activities (i.e. water production, water distribution, sales, etc.). Table 2.4.1: Depreciation rates applied by water utilities

Facilities Buildings Pumping station (equipment) Vehicles Office equipment Technical installation Water distribution systems Water storage tanks Water meters Depreciation rates in percent for 2001 5 5 10 5 5 5 5 10

E Tariff Policy, Process, and Institutional Setup During 1996-1998, the Government of Albania has taken important measures to create the basis for a regulatory framework in the water and sanitation sector and liberalized the water tariff. In 1996, the Albanian Parliament issued the law No.8102 of March 28, 1996 `On the regulatory Framework of the Water Supply Sector and Disposal and Processing of Wastewater.' The aim of this law was to establish a regulatory framework and set up an independent regulatory entity. One of the basic functions of this structure is to approve tariffs in the water and sanitation sector uniformly for all water utilities in Albania. On July 29, 1998, the Council of Minister issued Decision No. 479 `On the Liberalization of Tariffs for Drinking Water.' According to this decision, the new tariffs will be based on the conditions of each city or commune, as proposed by respective local authorities. The WRE has received assistance from USAID to establish regulations defining rules and procedures for its functioning and some general rules on tariff setting. The WRE is functioning on three basic documents: a) methodology for tariffs ­ April 1999; 2) regulations and procedures ­ March 1999; and 3) the water code [30] ­ March 2001. The following issues are important to mention: Liberalization of tariffs. Based on above mentioned regulation, each water utility had to apply for a new water tariff annually to the WRE. The first new water tariffs were

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approved in 1999. Until now, about half of the water utilities are operating with the new water tariffs. The methodology of WRE provides with the formats for application and supporting documentation requirements. Cost recovery. The tariff methodology of the WRE provides recommendations for tariff estimation that should cover: (a) operation and maintenance cost; (b) operation and maintenance cost and depreciation of existing assets; and (c) operation and maintenance cost and depreciation of existing and new assets and debt services. Currently the new water tariffs are in general below the operation and maintenance cost of the water utilities. Cross subsidy. The regulator has applied a cross subsidy policy between the customers, by using a system of six to seven different tariffs. Since 2000, the regulator has narrowed down this to three tariffs, for domestic, commercial and public consumers. On average, the new tariffs approved in 2001 are: for domestic consumers 15-22 Lek/m3, for budget organizations around 60 Lek/m3, and for commercial consumers 80 Lek/m3. The current tariff structure still implies a cross-subsidization policy, since the domestic tariffs are way below the cost recovery level. The ultimate goal of the WRE is to apply only one tariff for all customers in the mid-term period. Block tariffs (baseline consumption). The WRE has considered a two-tier tariff option, i.e. one tariff for baseline consumption and a higher tariff for higher consumption rate. However, this has not been applied, as it is connected to the establishment of the metered consumption billing system and to a reliable statistical data on the affordability level from different categories of families at city level. Excess/surplus fee for water meters. The WRE recommended that customers should pay the capital cost of meter installation. In addition, it recommended that payment could be done by installment from customers. However, the water utilities used various schemes ­ some prefer to charge the capital cost of meter installation on the customers by monthly installments, while some other request upfront payment. Revaluation of assets. With the transformation of state owned enterprises into commercial companies, the Ministry of Economy and Privatization has developed the methodology for revaluation of existing assets. Monitoring and enforcement. The WRE has the legal rights to monitor and apply penalties in case of law violation. Practically, it becomes very difficult to enforce it, especially with state enterprises. The WRE does not have yet a system of performance indicators. The KfW has a program of technical assistance to the WRE striving to build more capacity on basic functions of the entity, including tariff setting methodology, procedures, criteria, and alike, which has not become operational yet. 2.4.4 Revenue collection and enforcement actions Any strategy for the enforcement of fee collection should be considered as a complex process embracing actions from different interested players and a close collaboration among them. The enforcement should be seen as a process based and justified by the recent legal changes in the water sector, especially in the context of "Law on Organization and Functioning of the Local

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Government," the resolution of the Council of Ministers on the "Liberalization of Tariffs for Drinking Water," as well as other laws regarding service standards and codes of conduct of service providers (see sub-chapter 2.4.1). The enforcement could be viewed incrementally, from the least compulsion to the most decisive actions. The most important components are: Fairness and professionalism of the utility: The enforcement really starts with the utility when it behaves in a fair and professional way with the customers through regular and accurate billing, fast response to customers' complaints, and good service quality. Experience shows that this is an important factor that improves relations with the customers, while it gives more reasons to the utility to demand the same loyalty from the customers in terms of fee payment. Regulations for enforcement exist on paper, but lots of improvement should be done. More importantly, sanctions should be clearly defined. There was a persistent request from directors of water utilities made to the Government to proclaim the water bill as an executive title, similarly as for the electricity bill. This was implemented in 2003. Support of the local authorities to the water utility in the following ways: - Local government works with the media and structures of the civil society to raise the awareness of the population and warn them on sanctions for wrongdoers. - Local authorities countersign letters of warning sent by the utility to non-paying customers (a deadline for compliance should be established in the letter). Notification of non-payers by the police or obligatory presentation to the police when all the above efforts have not worked. Those who refuse to show up within defined schedule should be indicted to the court. Local government should facilitate a written agreement between the police and the water utility to ensure permanent assistance from the police forces (this was envisaged by high-ranked police officials in a co-ordination meeting with water sector professionals and the Government). The question is which kind of police is going to get involved in this process. The Municipal Police would be a feasible solution for this kind of action, but unfortunately this structure is established only in Tirana. However, the involvement of the Public Order Police would still be useful. The water utilities should cut water off if amounts due have not been paid. Water utilities should use appropriate devices for this purpose (solutions should be provided for indoor/outdoor connections, businesses and domestic consumers). If water supply is illegally re-connected, the responsible persons should be indicted to the court. The court should establish a single session for a case and the decision should not be subject to appeal at a higher judicial levels. The Bailiff Office should deal with the offenders if they fail to comply with the court's decision within the established time. The most difficult part of this process is related to the indictment in the court. The compulsion to appear in the court does not function properly and, should a condemning decision be proclaimed, it is difficult to execute it with the Bailiff. The mechanism between the court and the Bailiff should be better defined to enable this process. 2.4.5 Some institutional and regulatory shortcomings to be addressed Taking into account the amounts of aspects it regulates, the legal framework can be considered more or less completed, but its quality seems insufficient. The need (and practice) to change and

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continuously improve the laws shortly upon approval and the frequent interventions of the Constitutional Court is an indicator of this low quality [15]. In many cases, normative acts and regulations appear weak and hardly applicable. Often it is observed that institutional conflicts are deriving from partially overlapping jurisdictions, mismatching of responsibilities with functions, and authority with instruments of control. There are often conflicts of laws with by-laws; the latter often complicating procedures which make the laws difficult to apply. The decentralization and institutional reform of the water and sanitation sector presents many uncertainties as several by-laws necessary for its functioning are still not available. Albanian legislative system in general is mostly an expression of upper-level political will rather than an outcome of a democratic negotiation process. Experience shows that when approval of laws goes through consultation, public participation, and takes an educative approach related to interested groups, possibilities for their successful implementation increase significantly. More in detail, some of the uncertainties encountered are: The Law on Local Government assigns full administrative, investment, service, and regulatory powers to municipalities and communes. The Central Government has not defined the ways in which this process will be implemented. Some articles of this law do not have the necessary complementary acts. The law provides for difference between national and local interests in the water sector. However, it is not defined yet the nature of such national/local interests and the mechanisms of protecting them [35]. Ownership of assets for water and sanitation sector needs further consideration. The law says that local governments can own the assets, or the service provider. In this case, the local government initially will own the service provider. For both approaches, additional provisions need to be adopted. Privatizing water services is contemplated as a way of fostering efficiency in the sector. Who will have the authority to decide on privatizing these services at local level? Are there sufficient means to oversee this process and, subsequently, protect consumers from excessive monopolistic attitudes of private suppliers? Which will be the role of local governments in this case? Institutional structures such as Ministry of Environment , Sanitary Inspectorate, etc. involved in regulating and ensuring sustainable use of resources and quality of service have financial problems, are understaffed, and have difficulties to enforce standards. Tools need to be developed and provided to enable them to perform their duties properly. Among other goals, reduction and prevention of environmental pollution is one of the main areas of MoE's activity. In addition, any juridical person intending to develop an activity with eventual environmental impacts should apply for a permit to the MoE, which retains the right to monitor compliance of such activities with the issued permit, any time. However, it is not clear who will evaluate beforehand that an intended activity may, or may not have impacts on the environment and decide whether permission to the MoE should be requested, or not.

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2.5 PRIVATE SECTOR GROWTH AND CLIMATE FOR INVESTMENTS IN WATER SUPPLY 2.5.1 Private sector development in Albania The reforms enacted in Albania have contributed to the liberalization of economic sectors and their opening up to private domestic and foreign entrepreneurship. Due to this process and the privatization of state-owned enterprises, the share of the private sector in the economic life of the country has reached 75 percent of the Gross Domestic Product. The business structure is largely composed of very small companies making up 97 percent of the total number and small companies (with up to 50 staff) that make up two percent of the total number. The most active economic sectors are trade, construction, services, and transport [29]. Despite a legislation which can be considered to be more or less liberal for foreign investors, the facts show that Albania has not been very successful in attracting foreign investments. The cumulative foreign direct investment during the 1992-2000 amount to USD 598 million, or 15.7 percent of the 1999 GDP, according to official statistics. The number of foreign companies is 2,422 out of which 810 are foreign and the remaining are joint companies, foreign-domestic. Regardless of important achievements, the private sector remains unconsolidated and vulnerable to external and internal shocks. Its level of development remains low; companies have limited possibilities for investments and limited access to bank loans. 2.5.2 Private sector's involvement in the water services The water sector is among those with an appropriate technical heritage. Following the country's closure with the West, many Albanian professionals were educated both, in Albania and in the Soviet Union and other East-European countries (until 1960). Presently, there are many design and construction companies, which can count on prepared professionals within their ranks. Postgraduate training in Europe and the US has become an important goal for the young generation of engineers and they are introducing updated design methods in water supply. The use of new technologies has been strongly encouraged by foreign consultants, donors, and NGOs working in the country. For instance, large-scale use of polyethylene in water supply was unknown in Albania until 1997. Four years later there were many companies with the appropriate expertise for this application. A particularly vivid sector activity has helped the fast exchange of knowledge among enterprises throughout Albania, making this new technology predominant over the old one. Other businesses are specialized in the commercialization of pumps and related appliances. A market survey shows that most of the advanced materials used in water supply are available in the country; other non-frequently used products can be imported within reasonable time. In this climate, there exists the capacity of private companies to be involved in service contracts in the water sector. Areas of interest could be meter reading, billing and collection, accounting, financial audit, or the completely hand over of operation and maintenance of small systems. 2.5.3 Corruption and transparency of the public administration There is consensus among experts and foreign institutions that corruption is widespread in Albania. Customs, institutional structures involved in public procurement and privatization, the judiciary system and the police are among the most perceived as corrupted sectors. Political interference aimed at creating benefits for some public officials is widespread. Even though widely discussed, there have never been spectacular cases of corruption proved beyond any

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doubt, or important public officials condemned. Public administration is also indicated as corrupt and not transparent [15]. For instance, there is a tortuous process of obtaining license to start a private business (with either domestic, or foreign capital). Many people find it convenient to cut through the red tape of bureaucracy by paying bribes. In this way, they get licenses/permits much faster. Corruption in water and sanitation sector is believed to exist mostly in procurement and supervision of infrastructure projects and related activities, even though there have been only a few proofs to support this claim. This kind of suspected corruption is the most difficult to prove. Things are somewhat more apparent in the operational structures of the water sector. For instance, not all illegal connections in piped systems are done by beneficiaries themselves. In many cases, there have been water enterprises' technicians doing it, upon payment. In other cases, certain businesses bribe billing workers to reduce the water fee, or not reveal the presence of their business to the water company. In this aspect, there is a need for control and incentive schemes for meter readers and bill deliverers. Corruption is treated in the Penal Code, Law on Administrative Violation, and Law on Public Official Status. These acts define types of corruptive behavior, issues of administrative violation, conflicts of interests, their level of penalty and related procedures, as well as internal regulations of state institutions, ethical codes of public officials, declaration of property, etc. This part of the legal system has the following institutions for its enforcement: The High State Control (HSC) has large competencies for control; however, it has very limited possibility to enforce sanctions. The HSC can only propose to the executive of the scrutinized organization to undertake sanctions against corrupted officials. In most cases, the organization does not apply the recommendations of the HSC. At this point, the HSC can transfer the case to the prosecutor, or bring it to the attention of the Parliament. The internal control is almost absent in many organizations, or it is a weak sub-division of the organization itself. Mostly, this structure colludes with the rest of the structure and its superiors are not motivated to punish corrupted employees. The prosecutor has the right to impeach, while the court has the monopoly of judging and providing justice. The corruption is treated indirectly by incentive policies aimed at limiting corruption by enhancing efficiency, professionalism, and institutional reform. The latter defines the institutional accountability to the law and to the public, internal/external control, transparency of governance, public officials' performance, etc. An assessment of the Institute for Contemporary Studies (ICS) [3] concludes that corruption is well defined in the normative system; the very basic institutions for law enforcement exist and, at the same time, the punishment foreseen by law cannot be classified as soft. However, the law enforcement is weak and this weakness intensifies while facing a corruptive behavior. Apart from the study outputs, it seems that such problems derive also from the lack of proper tools/institutions to enforce the law, lack of transparency, as well as lack of pressure and participation from the public opinion. Considering that the corruption is higher when functions are concentrated and authority centralized, the institutional reform strives to create the decentralization of functions, distribution of authority and improvement of transparency. The institutional structure in Albania shows that

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many functions are concentrated and there is quasi-monopoly over important sectors, such as water supply, electrical energy, telecommunications, etc. Moreover, authority is often concentrated in the hand of political officials acting as directors of these organizations. They have considerable discretionary powers and political sheltering, which may lead to rent-distribution type of corruption (i.e. large procurement, privatization, etc.). In other cases, there are groups of officials having smaller discretionary powers, but still giving opportunities to seek corruption, such as issuing of licenses for private businesses, definition of prices in customs offices, etc. [3]. Therefore, even though the corruption has been more or less adequately addressed in the legal framework, enforcement of law in relation to corruption has been weak; often, governmental agencies are among those who totally ignore the law. These facts adversely affect the domestic and foreign investments, thus, slowing Albania's development by limiting economic growth.

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2.6 GOVERNMENT'S POLICIES AND DEVELOPMENT STRATEGIES 2.6.1 Public sector governance and management Despite the achievements attained, the Government considers that the need to deepen the institutional and legal reforms of the public sector should remain at the focus in the future [29]. The overall institutional reforms intend to: (a) increase the planning capacity and effectiveness of the institutions in terms of application of policies and laws; (b) increase the financial efficiency and enhance the accountability; and (c) increase transparency and reduce corruption. For the interest groups, especially the poor, the institutional reform aims to: (a) create equal chances to benefit from development opportunities; (b) ensure equal representation in public decision-making processes; and (c) guarantee an adequate provision of public goods and services. More in detail the following issues are envisaged: The Government intends to continue strengthening the public order and step up the fight against organized crime and illegal trafficking. Meanwhile, the Government will be committed to a more intense collaboration with foreign institutions involved in this field and create conditions for the application of international conventions. The Government considers corruption as one of the transition phenomena that has most negative consequences and high public costs. The fight against corruption will consist in: (a) increasing transparency/accountability; (b) apply measures to discourage corruption; (c) strengthening the law; and (d) increasing participation of interest groups, media, etc. The reforms in the judiciary will receive special attention in: (a) increasing the quality of the judicial process; (b) raising the professional level of judges, prosecutors, lawyers and improving their motivation; and (c) consolidating institutions and improving the judiciary. The main goals of the public administration reform will be: (a) clear delineation of competencies and accountability of institutions and public officials; and (b) growing division between the political and civil posts and the stability of civil administration. The main objectives for reformation of the fiscal administration will be: (a) increase the budget revenues by expanding the taxable base and reducing the informal economy; (b) improve administration of budget revenues by increasing the efficiency of budgetary expenditure; (c) improve the public procurement procedures; and (d) efficient recording and administration of state assets. In relation to the decentralization reform and strengthening of local governments, the following objectives are planned for the next three years: The decentralization of the public functions and responsibilities of the local government and definition of other sub-functions allowing more decision-making regarding priorities, use of resources, and performance of these services (education, public health, water and sanitation, etc.). The Government will continue to improve fiscal administration by providing a better distribution of national resources and by transferring the property to local government units, which will be active participants in budget planning and allocation of funds for investments and services.

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The GoA will encourage local government units to apply the same principles in governance, particularly in relation to administrative and financial reform and in relation to: (a) the civil servant status through standardization of jobs and their measurability, increased professionalism, etc. The GoA will support training center for elected officials and employees of the local administration; (b) implementation and control of expenditure; (c) community participation in governance; and (d) extension to local level of anti-corruption measures.

2.6.2 National Strategy for Socio-Economic development (NSSED) The sustainable urban and rural development is a long-term objective of the Government. It will be achieved through the implementation of strategic integral programs embracing aspects of land development, technology, services, environment, etc. For this purpose , the NSSED of 2003 has addressed the main development issues and problems and defined various measures and actions, and targets for the period 2003-2006, to achieve economic growth, poverty reduction and institutional strengthening. The urban development and reduction of urban poverty will be achieved through the application of urban integral policies, which will focus on: (a) creation of a business climate to attract private investments and increase employment opportunities; (b) establishment of a transparent regulatory framework for business activities; (c) development of efficient public services in urban areas; (d) protection and recovery of urban environment; (e) improvement of security and public order in urban areas, and (f) reduction of non-income poverty by increasing access to basic infrastructure services, such as water supply, sewerage, etc.. The rural development strives to reduce poverty and increase development opportunities in rural areas, scarcely covered with services. The Government's strategy includes: (a) poverty reduction through sustainable growth of production and income generated by agricultural activities; (b) sustainable use of natural resources; (c) increased access to quality rural services, such as education, health, water and sanitation, transport, etc.; and (d) diversification of rural economies and increased income from non-agricultural activities. The environmental protection policies aim at contributing to sustainable development. In this regard, Government's medium-term objective will be: (a) to stop the process of environmental degradation; (b) to rehabilitate polluted areas; and (c) to increase the sustainable use of natural resources. The attainment of these objectives will have positive effects on growth and poverty reduction and create conditions for a sustainable development. Environmental interventions will be given priority in those areas in which there is a high level of human exposure to environmental risk, environmental assets are endangered, and the damage has a greater effect on the poor. Priority measures will include: - Institutional strengthening: Attention will focus on the consolidation of the Ministry of Environment, identification of local bodies specialized in environmental issues, inclusion of different groups in awareness raising and decision-making. - Implementation of environmental policies and instruments: The most important will be the implementation of the National Plan for Environmental Intervention. Instruments will include, among others, the adoption of standards on wastewater discharge. - Reduction of pollution from existing sources: Attention will be concentrated on pollution sources close to inhabited areas and at the highest risk.

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Measures for a sustainable development and utilization of resources: Efforts will be made to combine policies that increase the motivation for a rational utilization of resources and equal access to them, especially by the poor.

2.6.3 Policies and strategies related to the water and sanitation sector A Strategic Framework for the Development of the Water and Sanitation Sector In May 2001, the Government of Albania drafted the Strategic Framework for the Water Sector. Its main goal was to define an approach for a water strategy, which would then allow Albania to have reliable water supply and sanitation services for all and to provide the institutional capacity to support this sector [21]. The following preliminary goals were identified: Protect water resources through rigorous implementation of permitting and enforcement authorities. Undertake investments to upgrade/extend water and sanitation systems and improve water quality. Improve cost recovery through efficient utility operations, tariff adjustments, metering, reduction of illegal connections, and improved fee collection. Decentralize investment, operations, and control to local government, with central government focusing on water resources management, regulations, and standards. Start alternative management forms of water utilities, such as local government owned utility assisted technically, management contracts, concessions, and privatization. Transfer ownership of water and sanitation infrastructure to local governments and start a national training program aimed at increasing sector efficiency.

This strategic framework is made of several elements envisaged that are: Institutional and regulatory conditions and need for reforms/adjustments: It affirms the new law on local government, the regulatory structure, as well as the action plan to align and achieve the reform. Standards as the basis for planning and management: It stresses the importance of customer service standards that will be set according to land use master plans and development standards, design criteria, water quality standards, and effluent discharge standards. National database and needs assessment: Given that Albania does not keep an updated national-level database regarding water infrastructure, the Government recognizes the importance to accomplish this element by defining a national needs assessment process and establishing a project priority management system. Capital investment institutional structure: The Government is aware that a realistic estimate of long-term capital planning should extend over an initial period of 20-25 years, thus, a capital planning strategy need to be developed for these investments. Building capacities in the water sector through development training: The new law on local government delegates a considerable amount of responsibility to local governments, which presently lack the necessary skills. Training of local officials is essential for the successful

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functioning of the decentralization process. Water companies need training to perform in a business-like manner and reach economic self-sustainability. B Rural Water Supply and Sanitation Strategy for Albania The Government of Albania, assisted by the World Bank, has prepared the Rural Water Supply and Sanitation Strategy [39]. It considers three options for a sustainable rural water sector reform: Delivery of services by the private sector: Rural structures (communes) could grant a concession to private operators who would take the financial risk of investing and operating the system. The commune would limit its responsibilities to regulating the private operator. Realistically, only a small part of the rural systems could avail of such involvement from the private sector. Delivery of services by Local Government: This option has several drawbacks because: (a) the regulator and service provider would be the same; (b) for electoral reasons, local governments would hardly accept to become unpopular by applying proper water tariffs; and (c) the communities would have an insignificant role to play and this would impact their willingness to pay. Delivery of services by the community itself: Experience shows that best results in providing water services are achieved when putting the community at the center using Demand Responsive Approach (DRA). This consists of enabling the community to plan, develop, manage, and finance water services. The following issues are crucial: (a) community participation is essential throughout the water supply project, (b) NGOs and the private sector provide services and help the community to develop and manage schemes efficiently, while the government's role is a facilitating one; and (c) training in operation and maintenance, and management are key factors to ensure sustainability. The Rural Water Supply and Sanitation Strategy is based on three principles: Grassroots participation and empowerment: Decision making involving all beneficiary groups will ensure that services are demand-oriented, properly dimensioned, and affordable. Two approaches can be distinguished here: The Community Water Association Model ­ the community will rehabilitate/built their own system and will be responsible to manage and maintain it. The Commune Model ­ this is the same as above with the difference that the commune authorities will facilitate beneficiaries' involvement in planning, design, and financing of the system. The latter will cover the entire commune and once the system is completed, the commune authorities will be responsible for the operation and maintenance.

Cost recovery and sustainability: The beneficiaries should provide 25 percent of the capital cost of the investment in infrastructure. The remaining part should be borrowed or received as a grant by the commune through the Rural Water and Sanitation Agency (RWSA) that should be established for this purpose.

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Enabling institutions that facilitate the community-driven approach to rural water supply: The Government should create the RWSA, governed by an independent board composed of government and civil society representatives. The RSWA should be present at central and regional level. It will receive operational budget and investment funds directly from the Government, but also from international donor agencies. Its main task will be to assist communities and Commune authorities in building and managing their own water systems. The major economic benefits for the rural population will be the improvement of water services, time saved in fetching water, improved health situation, small business opportunities through employment in service provision, increased access of the private capital in rural areas, increased institutional capacity of the RWSA regional structures, impact on poverty alleviation, etc. The Rural Water Supply and Sanitation Strategy is of utmost importance, because for the first time a strategy is developed to improve water services in the often overlooked rural areas. This comes at the right time when the decentralization process opens the opportunity for sustainable improvements in this field. . In this aspect, the more general National Water Supply and Sanitation Strategy endorses all finding and recommendations of the Rural Water Supply and Sanitation Strategy. C Summer Time Action Plan for the Water Supply Sector In May 2002, the Government has approved this plan in response to the difficult situation in the water supply sector during the summer time, when demand is higher and water resources are at their lowest seasonal yield. The GoA recognizes that improper management, aging of water infrastructure, lack of water meters, illegal connection, and low revenue collections are those factors that have mostly contributed to the worsening of water supply services in Albania. Another implication is the unfavorable situation of water resources due to recent scarce precipitations. The Government is also aware that this situation will lead to the reduction of hours of water supply, which in turn will increase the possibility of water pollution, compromise the integrity of supply systems, create eventual social conflicts, and decrease revenue collection. The GoA has created an Emergency Group with representatives of several ministries, with branches at local level that worked with enforcement institutions to disconnect illegal connections and certain businesses (mostly carwash) that use large amounts of drinking water in their activity. The local group worked with local authorities and water utilities in improving the level of service to the customers. On the other side, water utilities and KESH worked together to define and optimize the patterns of electrical supply to water production facilities. Another area for intervention was the safety of water supply. The local branches of the Emergency Group report to the central level every two weeks about the actions taken and progress made. Summer Time Action Plan managed to mitigate some of the problems the water supply systems were facing during the summer of 2002. Based on this experience and with the objective to make improvements a round the year approach, the short-term action plan included in this Water Supply and Sanitation Strategy was created.

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2.7 GOVERNMENT'S PUBLIC INVESTMENT PROGRAM (PIP) 2000 ­ 2003 2.7.1 PIP disbursement and resource allocation Continuing the positive trend of recent years, Albania is expected to experience continuous growth. This implies the implementation of the on-going reform program aimed at modernizing the financial sector and strengthening public finance, improving public administration, enforcing law and fighting corruption, and reforming the agricultural land market. While considerable success was achieved in mobilizing resources for public investment, implementation of projects faced significant delays, especially in the infrastructure and public utilities sectors. A number of complex factors, both within and beyond government's control, and the lack of remedial actions are attributable to this situation. More in detail, the Government of Albania has done reviews in the transport, water, and health sectors where factors affecting implementation performance are linked to: - Unforeseen events, such as the civil unrest of September 1998 and the Kosovo crisis. Both these events affected the pre-contract and mobilization stage of the projects. - Overoptimistic project phasing, such as unrealistic assumptions on time needed to obtain donor funding and comply with donor's implementation procedures. This caused significant delays together with the fact that time and resources required in preparing detailed designs in water and transport projects were underestimated. - Factors outside project control, such as delays related to policy and bureaucratic environment that implementing organizations have to deal with.

Figure 2.7.1: PIP resource framework 1996-2003 (in US$ million)

500 450 400 350 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003

Financing to be identified Identified financing Committed financing

Year

Source: MoECT

The external financing gap for the 2000-2003 totals US$372 million. Satisfying this need for financing would allow the Government of Albania to carry out important and necessary PIP projects. The World Bank, European Commission, Italy, and Germany will remain the principal sources of external financing for the PIP [20]. Projects in utilities and transport infrastructure will account for the largest share in resource allocation, 59 percent. The Government intends to prioritize obtaining of new financing for:

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New projects in infrastructure with transport accounting for half of this amount Support to private sector development with particular reference to agriculture Support to institutional reform projects, human resources, and social service sectors.

Figure 2.7.2: PIP disbursement 2000-2003 by sector group (total disbursement US$ 1,539 million)

13% 13%

59%

Public infrastructure, utilities and environment Private sector development Institutional development

15%

Human resources and social services Source: MoECT

2.7.2. Medium Term Expenditure Framework (MTEF) The MTEF in Albania is intended to strengthen budget planning and achieve a more effective use of public resources [29]. It aims to do this by: Promoting fiscal discipline over the medium-term, so, ensuring that government revenues and expenditures are consistent with economic growth objectives Providing a framework for the prioritization of public expenditure Facilitating greater effectiveness and efficiency in the use of budget resources.

The MTEF is also intended to lead to positive changes in the preparation of Government's annual budget. The MTEF is being developed as an integral part of the budget cycle. Following approval by the Government, it provides the basis for the guidelines sent to line ministries at the outset of budget preparation. The MTEF is being built around four distinct elements: The macro-fiscal framework: This element provides the context against which key budget issues can be investigated and recommendation made for decision by the Government. The starting point is the elaboration of a three-year macro-fiscal framework that provides the basis for projecting public expenditure allocations. Crosscutting public expenditure: The second element is an analysis of key expenditure issues relating to the major economic categories of public expenditure that either cut across all sectors, or because of their size have implications for spending programs in other sectors. Sector expenditure strategies: The third element involves the development of sector expenditure strategies for each of the main sector components of the public expenditure

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program. The aim of these strategies is to ensure that public expenditure allocations are driven by sector policy and program priorities. Expenditure plans: The fourth element involves developing three-year expenditure plans consistent with the macro-fiscal framework and sector expenditure strategies, as explained in the first element. The World Bank comments on the MTEF [38] is that for the water and sanitation sector important data were not available, such as a breakdown in: (a) investment and recurrent costs; (b) expenditures undertaken by central and local governments, and (c) foreign and domestic financed expenditure. It is believed that the level of current public expenditure is insufficient to improve/stabilize the water supply sector, not to mention the issue of adequate wastewater disposal. It is expected that the role of the Government as an important source of finance will remain for some time to come. As the Government is successful in strengthening the role of the local authorities, the revenue stream of water utilities should increase. However, the Government expenditure in the sector should not decrease. This would help to overcome the chronic under-funding of the sector. The 2002-04 MTEF has addressed some of the weaknesses of the initial exercise. It has provided a more detailed analysis of payroll and wage bill reform, the budgetary implications of fiscal decentralization, expenditure plans, and resource ceilings [29]. 2.7.3 Government's budget for 2003 The 2003 budget is based on the Government's National Strategy for Socio-Economic Development (NSSED), 2003-2005 MTEF, Albanian commitments on Stabilization and Association Agreement with the European Union, as well as on the decentralization strategy. There are minor differences between the 2003-2005 MTEF and this budget, which reflect the latest discussions with the IMF. For example, the budget deficit in 2003 is projected to account for 6.6 percent of GDP as against the 6.8 percent projected in the 2003 MTEF. Revenues in the 2003 budget are projected to be 24.4 percent of GDP compared to 25 percent projected in the 2003 MTEF. According to the MoF, the budget is consistent with the maintenance of a stable macroeconomic environment and Government's objective of reducing poverty and promoting growth. The projected growth rate for the 2003 is set at about 6 percent. A reduction in the overall budget deficit to 6.6 percent of GDP in 2003 is envisaged from 7.4 percent of GDP in the 2002 budget. Public investment is projected to be 6.7 percent of GDP, whereas overall foreign financing will amount to 3.8 percent of GDP. Foreign financing will consist mainly on funds provided on concessional terms from the international organization or bilateral donors. The fiscal package that will accompany the 2003 budget proposes the introduction of an environmental tax and agriculture land tax. On the expenditure side, priorities in the 2003 budget reflect the objectives set out in the NSSED and the MTEF, particularly in relation to the sectors identified as important for promoting growth and reducing poverty. Public investment is set to rise to 6.7 percent of GDP, reflecting higher spending on health, education, social care, energy, water supply, and transport. Total expenditures are set to rise by about 10.4 percent compared to 2002 projections.

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Subsidies are set to be at 0.9 percent of GDP in the 2003 budget, compared to 1.4 percent of GDP envisaged in the 2002 budget, the major part, or 3.4 billion Lek will be allocated to KESH, while water supply and sewerage sector will share (0.76 billion Lek). The subsidies for the water sector increased significantly compared to what was envisaged for 2002, because the central government compensated KESH for its arrears from the water utilities, as part of the Action Plan for the recovery of KESH. In the 2003 budget it is projected a special amount of 2 billion Lek to regularize the inter-enterprise arrears, once the process of reconciliation will be finalized. This is in line with an agreement between the IMF and the Government of Albania to depart from a system of indirect subsidies, which created huge arrears among budget entities. Regarding the decentralization, all exclusive functions are delegated to the local governments. Government expenditures for the local governments are projected at about two percent of GDP in 2003 compared to 1.9 percent envisaged in 2002. Local government revenues are expected to reach 14.3 billion Lek in 2003, as compared to 12.5 billion in 2002. The proportion of revenues from the central budget will decrease from 76 percent in 2002 to 47 percent in 2003, in favor of locally generated revenues from different taxes. The distribution of this amount among municipalities and communes will be made based on lessons learned from the implementation of the distribution formula in 2002. The formula applied in 2003 budget will incorporate greater equalization effects, transition criteria, and a minimum per capita benefit. Table 2.7.1: Past expenditures and projections for 2003

Item Total expenditure Current expenditures Wages Interest Domestic Foreign Operation and maintenance Subsidies Local government expenditures Local budget (grant) Other expenditures Reserve fund Capital expenditures Domestic financing Foreign financing Cost of Bank restructuring 2001 (%) 31.5 23.8 5.6 4.0 3.8 0.2 2.7 1.3 1.3 0.8 1.4 0.0 7.4 4.1 3.3 0.3 Source: MoF 2002 (%) 32.3 24.1 6.4 3.8 3.3 0.5 3.0 1.4 1.9 1.0 1.4 0.5 7.7 3.7 4.0 0.0 MTEF 2003 (%) 31.8 23.5 6.3 3.7 3.4 0.3 3.1 0.8 1.9 1.0 0.4 0.6 7.7 3.8 3.9 0.0 Budget 2003 (%) 31.0 23.5 5.0 3.8 3.3 0.4 2.8 0.9 2.0 0.9 1.4 0.8 6.7 2.9 3.8 0.0

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2.8 ENVISAGED OBJECTIVES OF THE REFORM 2.8.1 Consumer satisfaction and equity ­ bridging the gap by serving the poor It is vital for the water companies to consult the public on their general perceptions of water supply services in order to understand the customer's requirements related to the service provision. Thus, every year the water companies should conduct qualitative and quantitative research to access the public's perceptions of water supply and sanitation services and improve the public's information and awareness regard water issues. This would allow the water companies to be more responsive to consumer's needs. The water utilities in Albania lack a professional consumer relation structure within the organization. Complaints are answered mostly with the intention of getting rid of people, rather than solving their problems and informing them. Thus, in view of reforming the water sector and encouraging private participation in service provision, new attitudes should be developed to serve the public diligently. Striving for cost-recovery or profit maximization should not leave consumers' satisfaction unconsidered. In this aspect, there are some elements to be taken into account when building a professional relation with the consumer: Consumer market research: The service providers should become aware of peoples' income and willingness to pay in the area covered by the service. Information on living conditions and traditions of the population should be obtained from government's statistics and/or inquiries carried out by the water companies. Cooperation: The water utilities strife to provide efficient and prompt service where needed. . The water utilities work with businesses in the area to assist in water demand and consumption patterns as required by technological processes. Communication: Whenever there are service failures or reductions in supply for different reasons, the water companies should endeavor to notify the consumers and providing the timeframe for service restoration to normal conditions. Complaints by consumers: If consumers complain about water services, the water utility should commit itself to inform the complaining consumer within 2-3 weeks on their action undertaken. Adequate service delivery: The water company should aim to carry out duties in an efficient way without incurring any unnecessary burden to the customers through unfair fees. This principle should be extended to all consumers ­ large or small ­ to ensure that all of them receive adequate supply of water . The issues above have also to be taken into account when tackling a difficult issue ­ the service to the poor. Indeed, the poorest segments of the population are hit the hardest; on average their accessibility to water is lower and the cost of access is higher. Presently, there is no mitigation strategy in place so that the poor can cope with necessary tariff increases and the necessary strict disconnection policy of illegal and non paying customer the water utilities have to apply in the near future. The Government should consider the development of policies that aim to improve access to water services, while reducing the burden of necessary tariff increases on the poor. This issue becomes delicate when considering "the poorest of the poor" ­ those who cannot afford at all to pay for water.

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The Government's preferred approach is to provide direct subsidies to the poor, so they can afford basic water services. As a definition for basic services the Government has adopted the WHO standard for covering basic hygienic needs: 20 liters per capita per day. The Government is currently lacking a tool to provide direct subsidies to poor consumers. The Economic Assistance Program, which is administered locally, does currently not fulfill the requirements for effective and transparently targeting the poor. In the absence of such a tool, the Government has facilitated to pilot a lifeline tariff approach which the water utilities of Durres, Fier, Lezhe and Saranda have decided to introduce. This approach includes the free delivery of the first 20 liter per capita per day to metered customers at no cost. Any amount consumed above the free amount will be charged at the normal rate. This will not only allow the very poor customers to satisfy their basic needs, it will also allow poor customers to consume more than the free amount at a discounted rate, as long as they are willing to reduce their consumption below 150 liters per day. The disadvantage of this scheme is that consumers consuming more than 150 liters per capita have to provide a cross-subsidy to the poor. However, this would increase the cost for someone consuming 400 liters per capita per day by only four percent. The water utilities will disconnect consumers who do not pay for quantities in excess of the quantity they receive for free. The water utilities will provide public taps for these customers as a way of mitigating the problem. Asking water utilities, which are inclined to act based on commercially driven objectives, to extend their coverage to commercially unattractive areas (areas where the percentage of poor people is high) is a difficult exercise, especially in the Albanian context. However, providing high quality service to high-income customers, while leaving needy areas under-served would create social tensions and an incentive for illegal connections. Water utilities are well aware of this situation and they are likely to embark on a more social approach if Government's policies would also consider subsidizing those utilities that accept to provide a more equitable service. Such subsidies should be performance-based and proportionate to each utility's commitment. A more equitable service is an important milestone and sector reform achievement and it is Government's responsibility to make this process less burdensome for water utilities, while ensuring a reasonably sufficient level of service to poverty-stricken areas. However, especially in rural areas, the Government needs to channel the limited resources to areas which have an economic potential. It would be irresponsible to invest in areas which will be abandon by people in the near future, because of a lacking potential to generate sufficient income. 2.8.2. Water resources management and environmental protection Sustainable development has been considered in terms of inter-generation equity: -future generations will need a stock of assets no less than those of the current generation. However, a standstill or status quo approach conflicts with most human nature, where parents usually desire to leave their children better off than themselves [17]. It is with such more proactive attitude that most ecological approaches to sustainable development are promulgated. In this aspect, the European Water Framework Directive is an example of a proactive commitment; it includes the concept of `no deterioration' in ecological quality, however, the main aim is to generate plans for the gradual improvement of the quality of water resources. The concept of water resources management is defined as a whole set of technical, institutional, managerial, legal and operational activities required in planning, developing, operating, and managing water resources [32]. Similarly, the term integrated water resources management, in decision-making takes full account of: All natural aspects of water resources ­ groundwater, surface water, and quality;

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The spatial variation of resources and demand; The interests of water users in all sectors of the national economy; The national objectives/constraints (social, financial, institutional, environmental); The institutional framework and stakeholders (national, local).

In particular, the last three non-technical elements require an institutional set-up that allows adequate intersectoral linkages. These linkages should not merely exist at the top level, but the decision-making should be decentralized until the lowest appropriate level, meaning that only those decisions that cannot be solved at lower institutional levels are taken at the top level. It is advisable that these intersectoral linkages should be mainly built on existing institutions and that the creation of new governmental bodies should be avoided where possible. So far, most of the attention of water decision-makers in Albania has been dedicated to water supply, where the main task is to match the ever-increasing water demand. Due to this, in many parts of the country, the most attractive alternatives for the development of water resources infrastructure have already been implemented and in many places, it is hard to think of feasible alternatives for a further increase of the supply. When put against the sharp increase in water demand, which is occurring and is expected to increase even more during the coming decades, the problem of water shortage takes critical proportions. Basically, a further growth of demand is no longer sustainable and adds to the problems to be solved by future generations. Thus, future development should be based on the principle that water is finite and attention should be shifted from managing the supply to influencing the demand (see section 2.9.3). More comprehensively, a sustainable use of water resources would include the following elements: Technical sustainability (balanced demand and supply, no overexploitation); Financial sustainability (cost recovery); Social sustainability (stability of population, stability of demand, willingness to pay); Institutional sustainability (capacity to plan, manage, and operate resources); Environmental sustainability (no long-term or irreversible effects).

A detailed analysis of the components of water resources management plan and environmental protection is presented in section 2.12.1. 2.8.3 Improvement of water utilities' performance In the past the Government of Albania has created and implemented several short-term action plans, of which the last one was the Summer Action Plan of 2002, aiming to improve the commercial and financial performance of the water utilities in a way that it can be monitored by a set of performance targets. Although these action plans helped to achieve some improvements, most of the improvements were short-lived and their contribution to sustainable improvements in the sector were limited. To overcome these short-comings, the Government is now embarking on a more long term plan which includes short and medium term actions to improve the water supply and sanitation services in the country. This approach is developed and laid out in this report.

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2.9 DEFINING THE INSTRUMENTS FOR THE REFORM 2.9.1 Legal and institutional reform The Albanian Government is committed to institutional reforms in the water and sewerage sector with the objective to establish sustainable investments and financial viability of the water utilities. The main principles that are guiding the reform process involve legal and institutional changes and measures to be taken. Changing the role of the government from service provider to policy maker, regulator and facilitator in the sector. Establish commercial management for self-sustaining water companies. Introducing a benchmarking water and sewerage baseline and monitoring system, Encourage gradual increase of private sector participation based on the experienced gained from the current PSP contracts with various water companies. Implementation of the new functions and competencies of the local government units in water and sanitation sector. Integrate the water service improvements in to Urban Planning Development of the city.

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Support institutions in charge of monitoring/enforcement to perform all their assigned tasks.

A Main Elements of the Legal Reform Review the legal framework governing the decentralization process and the assigning of competencies to the local authorities with regard to water and sanitation service provision. (ii) Complete any missing bylaws to provide the tools that would allow local government units to perform their competencies, such as tariff approval. (iii) Amend the Commercial Law and the statute of water utilities to allow local governments full representation in the supervisory council of the water company. (iv) Recently the Ministry of Economy has approved the proposed changes in the statute of the water utilities in a way that the utilities can enter into service agreements with municipalities and communes in their service area. B Main Elements of the Institutional Reform Reshaping the role and functions of the main stakeholders. The decentralization process and commercialisation of the water and sewerage utilities are changing the role of the main actors and the pattern of their institutional relations as described: - The central government organizations: as sector policy making, regulatory, environmental and technical standards setting authorities; which issues licences for water abstraction and utilization, provides capital funding, and facilitate the private sector participation. - The Municipality: as a new owner of the water and sewerage utilities, fully responsible for water and sewerage service provision, which approves tariffs, sets local regulations and policies, and supervise and monitor the public/commercial service provider's performance. - The Water Supplier: as a commercially oriented service provider that has organizational and/or contractual arrangements with local government units. (i)

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The Customer: deals with the commercial supplier that provides a public good on commercial terms.

The transformation of the water utility enterprises into autonomous commercially run utilities. Many utilities have been transformed into commercial entities, but the biggest challenge ahead of them is to establish their autonomy, as provided by the statute, to create for all parties concerned proper responsibilities, motivations and incentives for the utility. The basic requirements of the process are: - Merging of water and sewerage utilities into one management unit (ongoing); - Transformation of water and sewerage entity into autonomous Enterprises [SH.A.] (ongoing); - Transfer the ownership and the shares of the water companies to the local governments; - Ensure the representation of the local governments in the Supervisory Board of the companies; - Reorganization of the newly commercialized companies to comply with the principles of commercial operations: (i) rationalize staffing; (ii) enhance technical and managerial skills of the water and sewerage company staff; (iii) improve working conditions in the office and provide the necessary equipment; (iv) setup of computerized information systems; (v) implementation of customer census, and computerized billing system; (vi) update of accounting system, network mapping, etc. Ensuring economy of scale. Many urban centers in Albania are medium to small size and thus, to ensure the efficiency of the investments and operation in the service area, it is necessary to: - Review the service area and population served with the purpose of eventually increasing the size of the population served - Avoid the breaking up of the existing regional water companies into smaller units when they are transferred to the local governments - Explore options for bundling water utilities under one management so that it could be attractive for private sector participation. Decentralization of the water and wastewater services to local government levels. This process has started and it will take some years until it is completed. At the end: - The water and sewerage utilities should be restructured to manage water and wastewater systems efficiently under the regulatory control and responsibility of local governments. - Various forms of contractual arrangements should be explored to efficiently exercise the responsibility and authority of municipalities and communes, and provide a proper institutional and legal frame for the water and sewerage service providers with monitoring of performance targets and indicators. Clear division of responsibilities among all levels of government organizations. - New functions and competencies of local government units must match with both decision making authority and accountability. - Managing shared responsibilities in a multi-level governance system in the areas of policy, monitoring, and regulation. Introducing an enabling regulatory relationship between municipal governments and the water and wastewater utilities.

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Define how effectively to monitor and regulate the private sector to ensure that it carries out its contractual obligations without abusing its monopoly power Set/complement regulations that enable the municipality to efficiently control: (a) water price; (b) service standards; (c) water quality; and (d) environmental impact, etc.

Private sector participation. This is described in chapter 2.9.5. C Decentralization of Water and Sewerage Services to Local Government Levels The law "On Organization and Functioning of Local Governments," No. 8265, dated July 31, 2000, Article 10, par.1, stipulates that "The commune and municipality have full administrative, service, investment and regulatory competencies for their exclusive functions set forth in this article;" and paragraph3 stipulates that "The communes and municipalities shall assume responsibilities, among others, for the following exclusive functions: Infrastructure and public services: (a) water supply; (b) sewerage and drainage system and (flood) protection canals in the residential areas." Article 72 of the Law No. 8652, par. 5 stipulates: "Beginning on January 1, 2002, the communes and municipalities shall be fully responsible for the performing of (these) exclusive functions. Therefore, the first issues to be addressed for the local governments are the following: The service competencies. The local governments should determine responsibilities regarding: - The service area for which they are responsible for water and sewerage service provision - The supply of bulk water to the municipality/commune connected to the system or to the same water source - The supply of retail water in the determined service area, or to determine what entity provides that service - Wastewater collection and disposal services in their service area - Wastewater treatment services from its own facilities or provided by another entity. The regulatory competencies. In the framework of the new regulatory competencies local governments should establish: - The water and sewerage tariffs for: (a) bulk water (including extraction, and transmission costs) supplied to bulk water recipients; (b) retail water for customers; (c) wastewater collection and disposal for those customers connected to the sewage system; and (d) wastewater treatment. - The subsidy policy towards the poor, including the mechanism and level of subsidies for water supply and wastewater services - The set of regulations that enable them to efficiently monitor the behavior of the water and sewerage company as a monopole supplier regarding: (a) water tariffs to avoid passing the burden of the inefficient management and operation of the water company to customers; (b) service standards that match with the financial resources and cost of service; (c) water quality, which should comply with the GoA standards; and (d) environmental impact according to the environmental legislation. - A solid enforcement of the regulations.

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D Organizing Water and Sewerage Service Provision from Municipalities Local governments will have to revise their own organization structures in order to adapt to new functions and competencies and ensure effective management. A critical decision for the local governments will be how to organize the delivery of water and sewerage services. In this respect, there are various options to be considered: Municipal/direct service provision. Under this option, municipalities may establish their own organization to deliver water and sewerage services. This can be done either: - By setting up a municipal/commune water and sewerage enterprise where all expenditures and revenues of the water and sewerage services appear in the municipal budget - Or, by establishing a separate commercial entity to perform the service. If this option is considered, then it is important to make sure that these companies are established under the commercial code. Municipal representation in the board of the water and sewerage company. In case the water utilities are transformed into commercial companies, the responsibility of the owner is exercised through the company's Supervisory Board. In many districts, the water system's service area covers more than one local government, so the Supervisory Board of the company should be composed of representatives of local government units of the service area. In the interim, the Ministry of Territorial Adjustment and Tourism could be represented as capital provider and the Ministry of Public Economy and Privatization as the current owner of the shares of the company. The municipalities should be held liable for the financial obligations of the commercial company to keep the public service running. Service provision in cooperation with other local governments. This option is recommended in a situation in which smaller jurisdictions may find it inefficient or uneconomic to establish their own organization to provide water services. Those small municipalities and communes that do not retain technical, financial, and administrative capacity may want to establish jointly a single organizational arrangement to provide water and sewerage services or join one of the already existing water companies. Indirect service provision. Municipalities have the legal right to cooperate with other municipalities or communes under an agreed organization arrangement to carry out tasks of common interest. In this case, municipalities are allowed to provide water and sewerage services through a third party, for instance another organization, which can take the following forms: - By contracting out the water services to the first level of local authority: In this practice, various communes and/or municipalities of a district might want to contract out water and sewerage services with a regional authority. It is an option that can be particularly helpful to the smaller jurisdictions. - By privatizing the services: Under this option the municipality turns over all or partial responsibility for the water service to a third party, such as a private company.

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E Normative Local Policies/Regulations for Water and Sewerage Service Provision to Customer Although Article 10 of Law No.8652, stipulates the regulatory functions of the municipalities and communes, it does not provide a clear division of regulatory competencies between the central and local authorities. According to Article 11 of Law No.8652, "Communes and municipalities may undertake any of the following functions separately, or jointly with the central government, in compliance with the schedule set forth in chapter XI of this Law," and this has to be established through a separate law or bylaw. A fundamental question to be answered is: Who really sets the normative national and local regulations for water provision to customers with regard to: - Water quantity, quality, and cost - Classification of the users - Fees of connections of new customers with the network - Water billing - Penalties for overdue payments or damages caused to the meters or network - Cut-off of the service for illegal connections, or nonpaying customers - Design and construction standards, etc. The water code issued by the WRE covers most of the above regulations, assuming a certain standard of service. Given the differences in the level of service provision among different cities/towns, it is recommendable that local governments may have a space to regulate the above issues within the margins of their service standard. The Government's approach to the above questions is: Combination of national and local service standards in the water sector. Water sector legislation currently provides some customer service standards for water utilities, which have to be improved. These standards should be determined by the population served, land use development, socioeconomic conditions of the population served, and financial resources available. Based on the nationwide standards set by central organizations, the municipalities will have the right to set their achievable standards and keeping the national standards as a medium- or long-term objectives. Similarly, standards used in the design and construction should be national and the municipality will comply to the extent permitted by available resources. The central government could provide some capital financing to meet the minimum required level of service in water and sanitation. Licensing of water extraction. This is the authority of Regional Water Basins Authority, regulated by the law on water resources. Currently this structure is not operating and therefore water utilities must apply for licensing of water extraction to the Technical Secretariat of the National Water Council (to determine how much water may be obtained from a certain source within the area of jurisdiction of the Municipality). The request should have the authorization of the Municipality. In the current uncontrolled situation of borehole drilling for water it is recommendable that the municipalities should have a shared responsibility on monitoring and preventing any drilling of wells in their jurisdictions that affect the services of their respective water companies. Licensing of water providers. Currently, this is the authority of the WRE. According to the law, all water and sewerage utilities transformed into commercial entity must have received the licensing of water provision for drinking purposes from the WRE. It has to be determined whether this authority will remain with the WRE, or it will be transferred to the local government level.

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Review and approval of water and sewerage tariffs. The Law No. 8652 stipulates that local government units have tariff approval authority in water and sewerage sector. The municipalities will have to: - Develop procedures for the review and approval of tariff applications - Issue guidelines and forms for financial reporting. Monitoring of the water and sewerage service provider. The municipalities will have to: - Establish a benchmarking system for their company including baseline data and performance indicators - Develop performance indicators reporting framework and forms for the service providers to report regularly to the municipalities. Water quality standards and control. This is regulated by the Albanian law, which defines the water quality standards, and authorizes the State Sanitary Inspectorate to monitor them by testing the water quality in each city through their laboratories. Municipalities should use this monitoring to ensure that the service quality in their city complies with the standards. Water supply regulatory framework. Currently there is a "Regulation on the rules and working standards for the juridical persons who operate in water supply sector" issued by the WRE on March 21, 2001. According to the Law No. 8102, dated March 28, 1996, Article 26, "Regulations designed by the WRE, must be published and are legally binding for implementation." We recommend that the municipality would have a shared competence with WRE, i.e., besides the mandatory water regulatory framework, the local government may issue specific regulations under the conditions of its jurisdiction. Settling the debts of the water utilities. Before the transfer of ownership of the companies to the municipalities, the Government will settle the problem of debts that utilities have with their suppliers, such as with the energy corporation (KESH). This process is ongoing and most of the arrears are already paid by the Government. 2.9.2 Technical reform Setting and approving adequate tariffs and increasing revenues through better collection are not sufficient to transform Albanian water utilities into self-sufficient and financially viable enterprises. A radical change in the technical aspects of service provision is necessary to improve efficiency and reduce operational costs. This section presents some guidelines to follow in defining the technical reform, which contains these basic components: Metering as the basis for reduced water consumption and wastage. Universal metering is one of the key elements to improve the water supply services in Albania because a lot of the insufficient supply to customers is caused by customer over consuming and wasting water. This approach is more elaborated in chapter 2.9.3 about demand management. On the technical side this approach needs to be supported by the development and implementation of adequate standards for meter performance, especially under conditions predominant in Albania (e.g., high concentration of solids in the piped water due to insufficient pipe cleaning, air in pipes as a result of intermittent supply, pressure fluctuations, etc.), and adequate standards for meter maintenance.

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·

Investments. The responsible institutions will have to introduce a capital investments program for the short-term urgent rehabilitation needs of the aged networks. Also, the institutions should create a vision of the future development needs of the sector, and prepare a long-term capital investment program for water supply and wastewater infrastructure. Standards. One of the important required changes is to introduce new standards for goods and works to be carried out in the water supply and wastewater sector and new guidelines for designs of water supply and wastewater facilities. That will help all types of investors--domestic and foreign--to make efficient use of their limited resources and match investments with Albanian requirements. Leakage reduction and control. Reducing leakage involves elimination of leaks through replacement and repair of faulty pipes and accessories, and reduction of pressures (where necessary). Benefits of reducing leakage are: (i) operating costs can be reduced significantly; (ii) water supply is more reliable; (iii) public health is improved; and (iv) development of additional water resources can be deferred or avoided. An efficient leakage reduction program involves a thorough knowledge of network features and distribution of pressures in the system. Unbalanced pressure zones, incomplete loops, system occlusions, faulty valves, and improper service operations contribute to excessive leaking. A major contribution to leakage in Albania comes from illegal connections, which are mostly done with poor workmanship. Leak reduction should be seen as a permanent activity requiring commitment and technical capacity. The assistance of experts in leak management should be sought. Optimization of operations. This process goes through gradual replacement of old, inefficient pumping equipment with more energy-efficient ones, better reservoir operations, careful dosing of chemicals, use of advanced pipe materials (HDPE), etc. Where intermittent supply is the only alternative (as in most systems in Albania), an efficient schedule of supply in terms of pressure and hours of water availability to different areas and types of consumers should be elaborated. This requires a good understanding of networks and computer modeling to reach such optimization. In terms of maintenance, water utilities should move away progressively from the practice of breakdown repairs and consider routine preventive care of supply systems. Failure to maintain facilities would require major reconstruction costs that could be much higher than proper maintenance expenditures. This also involves careful analysis of the existing situation and the reasons for poor performance. Specialist's advice in refurbishing facilities and organizing better operation and monitoring practices is crucial. Another factor of optimization is the better protection of water resources from pollution, which is directly related to a decrease in the use of treatment chemicals and lower operational costs. Demand management. Given its importance as a fundamental instrument for the reform, this issue is presented below as a separate sub-heading.

·

2.9.3 Demand management The demand management approach is new for Albania. In some areas of Albania, water is still considered a free good, which should be provided at the lowest costs and in the amounts desired.

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Moreover, the water authorities tend to be supply oriented ­ in this approach, water is supplied in such quantities as estimated necessary assuming that the user will make proper use of it. The main elements of the demand management are: (i) establishing universal metering for production, distribution and consumption; (ii) introducing metered billing; (iii) enforcing tariff collection; (iv) disconnecting nonpaying customers; (v) disconnecting and regularizing illegal connections; (vi) introducing cost-recovery pricing based on the willingness and affordability to pay; (vi) conducting public/customer relations and awareness programs to support the demand driven approach. A demand-oriented approach looks at the real demand for water, which can be measured through the willingness of the users to pay for the water. The reason why water decision-makers at all levels (national, local) should try to control demand for water are: - This is the most cost effective way to improve water services to the huge number of customers in Albania who are currently not receiving adequate services. - The use of water is ever increasing, while resources are limited. - Water resources are deteriorating rapidly through over-utilization or pollution. - The costs of developing new resources are increasing, as the cheapest solutions have already been developed and financial constrains limit investments. The aim of demand management is: - To reduce the widespread over-consumption and wastage so that the water supply to customers with insufficient water can be increased - To limit water demand , thus, safeguarding the access to water for future generations - To ensure equitable distribution and to protect the environment - To maximize the socioeconomic output of water produced and increase the efficiency of water use. This entails a set of actions to be taken by the water decision-makers, which include awareness and promotion, education and training, as well as the formulation and application of implementation incentives to influence the demand for water. One of the most typical tools in demand management is water pricing. Water pricing has been taken up by a number of agencies, particularly the World Bank as the most important tool for demand management [41]. It has a number of important benefits, which make it a key instrument for the implementation of demand management, such as: - Increased price reduces demand and, at the same time, increases supply because it becomes attractive to reduce water losses - Increased price improves managerial efficiency. The water price is composed of different elements that reflect production (financial) cost, economic cost, the economic value of the commodity, and the client's willingness to pay. Water pricing should have two purposes: (i) to recover costs; and (ii) to enhance the efficiency of water use. In cost recovery, a distinction should be made between internal financial costs and external (or social) cost (see figure 2.9.1). From a financial point of view, water should be priced to cover the operational cost and to cover the depreciation of the infrastructure (capital cost). Economic cost includes, in addition to the financial cost, also external cost, such as environmental damage and societal cost (health hazards, etc.). Until here, the price reflects the total cost incurred by the society in the production of the commodity. Further, the economic value reflects the scarcity of the resource, which is generally expressed in the opportunity cost (the cost of not being able to use the resource for another economic activity). This opportunity cost depends on the willingness

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to pay by users. The economic value and the willingness to pay are not determined easily. Some users are willing to pay a higher price than others. Since these are often financial rather than economic (societal) considerations, willingness to pay is not always the right argument to establish the economic price (this is to prevent that water goes always to the highest bidder). In addition, willingness to pay is dynamic, depending on many parameters that include affordability, scarcity of the resource, and appreciation for the resource. Since all these parameters are timedependent and can be influenced by external and internal factors, the willingness to pay is a volatile parameter [32].

Figure 2.9.1: Components of the water price

Price Economic value

Surcharge to reflect Opportunity costs or Willingness to pay

Economic cost

External costs

Internal,

financial costs

Capital costs Operational costs

Although figure 2.9.1 is useful as an illustration of how the price of water should be established to reflect societal costs, water economists at the World Bank have come to the conclusion that the water price should not be based on opportunity cost or long-term marginal cost, but that it should be a reasonable price which should at least reflects the economic cost, thus, sending out the message to users that we are dealing with a precious and finite resource [41]. This would be a recommendable approach in the Albanian situation. 2.9.4 Financial Reform The financial reform process has started in the water and sanitation sector as part of the Government's overall policy and is supported by donors in the cities/towns in which they are engaged with their programs/projects. It comprises the definition of policy objectives, resource planning, allocation criteria, monitoring of the funds used, utility performance, new financial organization and management at the utility level, cost recovery tariff policy and methodology. This reform should encompass all levels of central and local government organizations, and public utilities throughout Albania. The most important aspects of the reform are: · Medium-Term Expenditure Framework, linking policies and priorities with resources available and efficient use of them at central and local levels

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· · · ·

Financial sustainability policy Change the way the Government is providing subsidies to the water utilities into a transparent incentive-based system. Subsidy policy to support the poor Establishment of new standards of financial management at utility level.

A. Medium-Term Expenditure Framework (MTEF) ­ Linking Policies and Priorities with Resources Available and their Efficient Use The Medium-Term Expenditure Framework is the three-year expenditure forecasts based on the Government's policies and priorities for all core and line ministries, including the Ministry of Territorial Adjustment and Tourism. The MTEF is a very useful tool for the water authorities because it provides a framework of how to link budget resources with priorities in the water and sewerage sector to support policy implementation and to achieve a more effective use of public resources. By updating every year the expenditure forecasts, it allows for adjustments in resource allocation between water and sewerage, urban and rural areas, from one year to another, and a better coordination between the Government and the donors. The first MTEF was prepared for the period of 2001-2003, and was updated annually as an integral part of the annual budget planning cycle. The Council of Ministers and the Parliament approve each year the annual budget for the next fiscal year together with the updated MTEF. With the budget of 2003, the Government approved also the MTEF for 2003-2005. The MTEF includes funds for operations and maintenance as well as for investment expenditures including counterpart funds for investment projects financed from external sources (see table 2.9.1). One of the important issues in the expenditure policy objective in the water sector is to phase out the debts of the water utilities to KESH in the mid-term. In a situation where almost all water utilities are loss- making and their financial recovery is not an easy solution, the MTEF for water should include resources that the water utilities can pay the electricity cost to KESH and other liabilities to budget enterprises and institutions. In the past the MTEF has been using the Public Investment Program (PIP) prepared by the Ministry of Economy as an input source for capital expenditures, but the PIP is not prepared any more. The budgeting for capital expenditures was transferred from the Ministry of Economy to the Ministry of Finance, and the Ministry of Finance does not prepare a PIP. However, it is important for the Ministry of Finance to restart preparing this document to allow for a better strategic vision of future investments in various sectors, their interconnections amongst sectors, priorities, externalities, efficient use, and policy recommendations design.

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Table 2.9.1: Expenditure for the water and sewerage 2001-2003 (million Lek)

Water Sewerage Co-financing donor projects Donor's funding Total Year 2001 765 345 2,100 3,500 6,711 2002 748 337 1,444 3,808 6,337 2003* 844 381 2,315 9,731 13,270

* planned B Financial Sustainability Policy The Government's objective is to make the water utilities financial viable commercial entities, which is a key element for sustainable service delivery. To achieve this objective the Government is pursuing the following policies: Cost recovery policy ­The water tariffs must cover the water service cost. A two steps approach is recommended: first, move gradually towards coverage of operation and maintenance cost, and second, after achieving the first level, water companies must go for full cost recovery water, including depreciation and debt service. One of the important requirements of the policy is that responsible authorities must approve water tariffs based on the recommended two-steps approach. The policy should take into consideration the following: The local authorities, responsible for tariff approval, should develop a phased cost recovery policy. The cross subsidy policy between different customer groups should gradually be terminated and only one tariff be applied for all customers. Introduce a new subsidy policy for families under the poverty line, by introduction of a two-tier tariff system (with zero costs in the pilot for the first tear, see chapter 2.8.1) Tariffs should reflect changes of the cost the companies have, Introducing metering-based billing and move towards universal metering Enforcement of fee collection.

The current degree of cross subsidy among the private sector, the budgetary institutions and the domestic consumers is quite high and this leads to inefficient use of water resources. To arrive to one tariff for all, the tariff level should be adjusted until the utilities reach a fare and equitable distribution of service cost among all categories of customers (families, private businesses, industry and budgetary institutions). An adjustment formula should be introduced in order that the water tariffs reflect the changes of the main input prices, such as electricity and inflation ratio during the fiscal year. This is necessary to protect the water company from unexpected changes of external factors and to maintain tariffs at the approved cost recovery level. These adjustments are the competence of the local authorities. The Water Regulatory Commission should provide assistance to the water utilities in tariff calculation methodology and develop appropriate guidelines to determine water supply and sewerage tariffs, including above mentioned tariff adjustment formula. To mitigate any negative impact the tariff policy could have on the poor, a lifeline tariff is recommended to be introduced (see chapter 2.8.1). The other elements of the sustainability policy are:

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Making the sewerage service self-financed by charging the customers the cost of the service. The water and sewerage utilities will have to establish sewerage service tariffs separated from water supply tariffs. The local authorities should make obligatory the request for wastewater tariff proposal from those utilities in which sewerage and water services are merged into one management. Enforcing the fee collection is linked to the regulation in place and the role and efficiency of the local government, civil society, police, and judicial system. The water code issued by the WRE provides the utilities with some of the tools to enforce collection, e.g., the right to disconnect nonpaying customer. The water utilities should implement the water code in their respective service areas. Implementing the metering programs as a priority to reduce the huge wastage of water and thereby reduce the operational costs. The GoA should support metering programs with prioritized investments in those municipalities in which enforcement of tariff collection is in place, and utilities have the capacity to read and maintain meters, and conduct billing and collection according to read consumption. Improving the quality of wastewater disposal ­ Financial implications. Currently, there is not any wastewater treatment facility in the country. This is becoming an issue for big urban centers and for coastal cities, for health safety reasons and for tourism industry revenue generation. On the other side, the construction of advanced treatment facilities requires huge investments and the operation and maintenance cost is currently barely affordable for most Albanian families. There are various options to cope with this situation, such as oxidation ponds and trickling filters requiring less investment and lower operational cost. The urban planners should include in their urban development plans or master plans the location of future wastewater treatment facilities. This will contribute to reduce the land cost of future investments. C. Change the Government's present subsidy policy, into a transparent incentive-based system In addition to the subsidies received directly from the budget, the water companies received indirect subsidies through their unpaid electricity bills to KESH and the oil companies, unpaid social security contributions and taxes, and overdue liabilities to other state enterprises. By the end of 2001, the outstanding arrears of all water companies towards KESH, tax administrations (VAT), oil companies and Social Security Institute were about Lek 3.8 billion, of which the debts to KESH were estimated to be about Lek 2.9 billion (IMF Source). In 2002, the Central Government paid KESH Lek 1.3 billion as part of the debts the water sector had towards KESH. Also, the Central Government provided Lek 365 million as a subsidy for the water sector in 2002 to cover parts of the operating cost (i.e., salaries, social security and chemicals). For 2003, the Central Government has allocated about Lek 2 billion to pay KESH the outstanding arrears from the water sector. During the first quarter of 2003, the Central Government paid Lek 500 million to KESH and the rest will be paid during the rest of the year. Also, the Government has allocated Lek 756 million to the water sector for 2003 as an operating cost subsidy for salary, social security and chemicals. It is therefore expected that by the end of 2003 the water companies will owe only a small amount to KESH and other state enterprises and institutions. Given the existing constraint on increasing water and wastewater prices and the current status of the regional water companies, it is unrealistic to expect these companies not to accumulate new arrears to other public companies and to the budget in the foreseeable future. Therefore, the

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Government, in consultation with the IMF, intends to introduce an adequate subsidy scheme until tariffs can be increased to a level that allows full cost recovery. To promote this process, it is suggested to divide the water companies into two groups: (a) companies with private sector participation through concessions or management contracts, or successfully restructured companies with technical assistance from donors; and (b) companies which still need time to prepare for future private sector participation or restructuring. Companies in these two groups should be treated differently. Companies in the first group and the corresponding local governments should sign bilateral service contracts, similar to the ones being offered in the framework of the pilot projects. As an annex to the service contract, the water company will be requested to prepare a business plan and a financial plan for the coming year. If necessary, the service contracts should be supported by a contract between the local government and the water company on the one hand and the budget on the other hand. The contract with the central government (Ministry of Territorial Adjustment and Tourism/Ministry of Finance), will have to specify the amount and phasing of the subsidy the central budget will provide in the coming year, and the conditions the company will have to meet in order to receive this subsidy. The amount of subsidy offered by the central budget should follow the two-step cost recovery approach. As a first step, it would allow the company to fully cover its operation and basic maintenance cost, based on its production technology, its collection record in the past, and the agreed performance improvement. This contract should also set out a timetable for gradually eliminating the stock of remaining overdue payment liabilities accumulated by the company prior to the commencement of the service contract, if any. The decision on whether a regional water company should join this group should be jointly made by the local government concerned, the central government, and participating donors. As at the beginning it will be very difficult to firmly establish the critical parameters of the business and financial plans, including the required amount of subsidies. The service contracts, as well as the supporting contract with the central government regarding subsidies should be reviewed at a jointly agreed time during the year. Concerning water companies in the second group, the subsidy policy of the Central Government should provide continuation of the financial support in a transparent, regularly monitored and controlled way, and in parallel develop a capacity building with support from donors. The central budget will continue to pay their electricity bills directly to KESH and provide the subsidy necessary to pay wages. To control cost, the annual wage bill should be set in agreement with the government. The Ministry of Economy and the Ministry of Territorial Adjustment and Tourism have the responsibility to provide the necessary assistance with the aim to establish a basic financial information system and basic managerial capacities in these companies. It is very important that the Ministry of Territorial Adjustment and Tourism initiates and oversees the reconciliation of past claims with other public companies, and should provide these companies with the necessary technical support to complete the process. These companies will be requested to set up collection units. Performance criteria for these companies should take into account their institutional capacities. In order to facilitate this process, the budget should provide the necessary means to support the efforts of the Ministry of Territorial Adjustment and Tourism and the local authorities in this area. Moreover, the Government is actively requesting technical assistance from international financial institutions and bilateral donors in this area.

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As part of this strategy, the short-term Action Plan (AP) of the MoTAT includes the following actions for the first group of water companies: Water companies and municipalities will sign the service contract between them. Water companies will submit to the supervisory council for approval the detail annual business plan and the financial plan. Water company will submit a short-term financial plan that includes the O&M cost recovery tariffs to be achieved in three to four years. Water companies will submit the short-term performance indicator targets divided for each year to the supervisory council of the company for approval. The central government will subsidize the difference between the tariff and the operating cost until the company breaks even. The government will apply performance-based investments and subsidy allocation based on the defined formula. The central and local governments and the water companies will agree on a phase-out subsidy plan in the medium-term. The Government should seek donors' assistance and cooperation for the implementation of this plan in the cities they are involved. D. Subsidy Policy to support the Poor The Government's Strategy for Socio-Economic Development affirms that about 29 percent of the population throughout the country lives under the poverty line. Most of the poor families are in rural areas. One of the policy recommendations in the report is the continuation of the support to the very poor families through a subsidy mechanism (see chapter 2.8.1). E. Establishment of New Standards of Financial Management A new standard of financial management will require thorough improvements in: (a) the organizational structure of the Economic Department; (b) new planning or financial forecasting methodology and standard; (c) computerized accounting system with sound policies and principles; (d) financial reporting to executive manager and supervisory board; (e) financial/investment decision on comprehensive financial analysis and reliable data; (f) new procedures of internal control of the inventory; and (g) effective auditing. This is a broad agenda for substantial improvement, and there are no recipes on how to implement it in each utility, but some of the standard requirements are presented below: Establish a cost-center based accounting and computerize the accounting system. This is an international accounting practice, that provides a good structure for the analysis of cost allocation and efficiency of recurrent and capital cost by functional areas and main activities, such as water production, distribution system, water sales, meter reading, maintenance, etc. The Albanian Accounting System, which embodies some features of the international standards, accepts this. In addition, it is essential to computerize the accounting system, which integrates all cash transactions, billing and collection system, inventory accounting, and will be able to present the financial statements and balance sheets, thus, generating consolidated financial reports. Improve billing and collection system and operation. One of the conditions to increase the billing efficiency is to have all technical data and customer data within a stable billing computer system updated regularly. This is the base for identifying all connections, providing with systematic information and reports on billing and collections, customers'

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profile, overdue receivables that will lead to adopt on time and realistic measures and policies. This has started in the Durres and Korca water companies and the initial experience indicates improvement in the commercial management. Develop a collection program for overdue accounts, based on the `aging analysis' and by providing incentives to pay the original bills for those customers who have the willingness to pay. The Water Code issued by the WRE must be considered as a basic document to regulate the customer relationship with the utility throughout the country. However, specific legal and regulatory aspects could be amended by the local authorities as dictated by the local conditions. The local authorities and water utilities should aim to strengthen the rights and liabilities of both the supplier and customers in water and sewerage contracts and services with the customers. 2.9.5 Private sector participation in service provision A Rationale for Private Sector Involvement Nowadays, there is a growing consensus that at least some functions, sometimes all functions, related to the management of water services can be entrusted to the private sector. In such context, it is necessary to mention some of the main characteristics of the water sector: Water supply is a natural monopoly. In fact, one service provider has such a dominant position that competition is difficult to achieve. In order to protect consumers against abuses of monopoly powers, regulation becomes important and necessary. The water sector is capital intensive. Studies from the United States indicate that the ratio of investments in fixed assets to annual tariff revenue is on the order of 10:1 for water, as compared with 3:1 for telecommunications and 4:1 for the electric power [13]. The higher ratio for water sector makes it more difficult to attract private sector involvement because the payback period is long. Experience in industrial countries and in some developing countries that have delegated water services to the private sector has shown that private sector participation can result in benefits such as stable management, higher efficiency, and improved access to private capital. The access to long-term private capital is crucial because water supply investments are large and bulky, and the cost can be recovered only over many years. Experience has also shown that the main catalyst for the interest in private sector participation is the proven record of poor performance and mismanagement characterizing most publicly owned and operated utilities in the developing world. Another important consideration is the insufficiency of public funds alone to meet the increasing investment needs of the water sector. The important objectives of private sector participation are to ensure improved management, higher efficiency and to acquire the capital needed for investments. Efficiency gains result in cost savings that can generate investment funds, whereas improved management may ensure easier access to private capital [13].

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B Options for Private Sector Participation Private sector participation (PSP) has eight main options, which vary in the degree of involvement of the private sector, the risk for both public and private, the duration of the contract and the relationship with the consumer. These PSP options may be grouped into two distinct categories: (i) public ownership; and (ii) at least partial private ownership. Each group includes four options that will be reviewed in the order of increasing private sector involvement. Public Ownership: In this group, the ownership of the assets remains with the government or the public sector. Service contracts: This is the simplest form of private sector participation, where the public authority retains the overall responsibility for operation and maintenance of the system, except for the specific, limited-scope services that are contracted out. The public authority also bears all the commercial risks and must finance fixed assets as well as working capital. The responsibility of the private contractor is limited to managing its own personnel and services efficiently. Usually, service contracts are used for maintenance, emergency repairs, billing and collection, equipment rental, etc. Local authorities that plan to use service contracts extensively may need to undergo some changes to fulfill their new role, which shifts from execution to supervision. Service contracts are usually set for periods of one to two years and are renewable. These contracts require little or no fixed investment on the part of the private firm. As the contract period is short, contractors are subjected to frequent competition, which encourages efficient performance. Another benefit of service contracts is that payments to the contractor are linked to the work performed, instead of guaranteed wages paid to a public utility's worker. Management contracts: This is a more comprehensive arrangement, where the public authority transfers to a private company responsibility for the entire operation and maintenance of a system. This gives the private company freedom for day-to-day management decisions without assuming any commercial risks. Therefore, the contractor has no direct legal relationship with the consumer. The private contractor acts at all times on behalf of the public authority, and yet it will not be paid unless rates are collected from the consumers. The public authority retains financial responsibility for the service and has to provide funds for working and investment capital. Payments to a management contractor are usually proportional to some physical parameter, such as improved efficiency, volume of water produced, reduction of unaccounted for water and improved collection rates. Such system creates an incentive for increased productivity. Their duration is normally from three to five years. In many cases, management contracts precede leasing or concession contracts. In this case, their main purpose is to put the utility in order when the quality of service is poor or when accounting, consumer records and information on physical facilities are not reliable. Lease contracts: These are arrangements where a private operator rents the facilities from the public authority for a certain period and is responsible for operation, maintenance, and management of the system. The public authority, which remains the sole owner of the assets, is responsible for capital expenditures for new projects, replacement of major works, debt service, tariff, and cost-recovery policies.

-

-

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Leaseholds are responsible for all operation and maintenance functions as well as for billing, collection, and financing working capital. Lease contracts can be medium-, or long-term in duration. They usually last five to ten years but can be extended for as long as 20 years. Payments to leaseholds are contingent on the difference between the tariff revenues collected and the operating cost. The fact that the contractor depends on collections for revenue is an incentive to provide good service, billing, and collection practices. The risks involved in a lease arrangement tend to be limited, making them a low-risk PSP option. Limited risks mean more competition from potential private partners, which benefit the public authority. In most cases, the public authority assumes the capital investments risk, and the leasehold assumes the commercial risk. The lease contract also states the penalties that will apply in case of poor performance. Lease contractors usually put up a security deposit that can be called in by the public authority if performance is unacceptable. A common performance indicator is the unaccounted water. Concessions: In a concession, the private contractor or concessionaire has an overall responsibility for services, including operation, maintenance and management as well as capital investments for the expansion of services. The fixed assets remain the property of the public authority, but they are entrusted to the concessionaire for the duration of the concession contract, and must be returned in the same condition at the end of the concession period. The benefit of combining responsibility for operation and investments in the same entity is that it provides an incentive to the operator to make efficient investments decisions because their consequences will affect it directly. It also provides an incentive for technological innovations, as the operator will directly benefit from any improvement. Concession contracts usually run for 20 to 30 years depending on the level of investment and the payback period needed for the concessionaire to recover investment costs. When contract expires, all works and equipment are turned over to the government or public authority. Under concession contracts, the contractor is paid for its services directly by the consumer based on the contractually set price. If expenses exceed revenues, the private company suffers losses, which is the largest risk it assumes. Penalties are levied if the concessionaire fails to meet targets for service coverage or the quality of service specified in the contract.

(At least) Partial Private Ownership: In this group of PSP options, partial or full ownership of the assets is transferred (permanently or temporarily) to the private sector. BOOT and its variations (BOT and BOO): Under a BOOT contract, a firm, or a consortium of firm's finances, builds, owns and operates a specific new facility or system. After a specified period, ownership of the facility is transferred to the public authority. BOOT arrangements are attractive mostly for new plants that require large amounts of financing, such as large water or wastewater treatment plants, but they are not suitable for water distribution systems [13]. Under a BOOT contract, the public authority is often responsible for determining the demand for the service being contracted. The duration of BOOT contracts is usually the period needed to retire the debt incurred and provide a return to equity investors. At the end of this period, the contractor transfers the facility to the public authority. A BOOT contract can represent a substantial risk for the private firm, if there are no assurances that the output of the investment will be paid for by the public authority or that the quality of services will be uniform and according to design standards. Studies with BOOTs have shown that four issues require careful consideration. First, the legal basis for

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private sector involvement has to be established. The second issue is related to the effect on financing caused by the size and length of time of these contracts. The implementation time is usually longest for the first BOOT undertaken by a country. Many BOOT projects tend to be large and can cost millions of dollars. The large size and long maturity required raise the complexity of the financing package, often also the number of financiers needed to complete the package. The third issue is related to pricing and contractual arrangements. Pricing is difficult because it is often predetermined and the private investor does not have the opportunity to recover early losses by making higher profits when industry conditions improve. Fourth, the level of tariffs and the quality of service provided can become particularly sensitive, because, in most cases, the private company is providing a service directly to consumers. Variation of BOOT system is known as BOT and BOO. In the first case, the ownership is transferred to the public sector as soon as the facility is completed and the function of the private firm is only to build and operate it. In a BOO, ownership is not transferred to the public sector but remains with the private firm that builds and operates the facility. Reverse BOOT contracts: Private firms may not be interested in participating in a BOOT-bidding process or may request very high risks premiums in return for their participation. In such cases, it may be preferable for the public sector to finance and build the facility itself and then to contract a private firm to operate it over a long period. To acquire the facility gradually, the private firm pays an annual fee to the public authority, which usually covers the full debt service of the entire investment cost. Private sector participation is encouraged by the lower risk of reverse BOOT as compared to BOOT. In addition, reverse BOOT offers the advantage of efficient private sector operations and encourages the private operator to keep the facility well maintained, expecting to become its owner one day. Joint ownership or mixed companies: If the country environment is risky, it may not be feasible to pass full responsibility for investment and operations to the private sector. In such cases where it is desirable to maintain a higher degree of private sector participation than service or lease contracts allow, joint ownership maybe a good solution. Under joint ownership, a private firm and the public authority incorporate a firm under the normal commercial code. At the beginning, they have almost equal share; later, the public authority may sell off its shares. The public authority may keep a golden share that entitles it to special powers usable in specific situations. The private part, normally, has majority representation on the board of directors, even if the public and private equity shares are equal. In this case, the private partner prevails in the day-to-day management of the new firm. A corporate agreement requires a minute definition of duties and obligations of the two partners, especially how profits will be shared between them. Outright sale: The sale and private ownership of water supply and sewerage systems may be prompted by the desire to completely separate ownership from operations and maintenance. It is also a way for the private sector to raise revenues. The attraction of private buyers depends mainly on the rates they are allowed to charge because the installations themselves have virtually no alternative value. The United Kingdom's experience with its full privatization of the water sector is unique. Shares of the British water supply companies are all sold on the stock market to private investors. In such cases, pressure to operate efficiently is exerted through the operation of the stock market.

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C Comparison of Private Sector Participation Options The eight PSP options reviewed, to varying degrees, promote the operational efficiency and commercial viability of water utilities. They introduce competition, improved cost recovery, as well as performance-based compensation (mostly). Management and service contracts are designed to improve operations within specific activities, mainly in the short-term. If the contractor assumes commercial risks, this consists an incentive for improvement. So, lease contracts and concessions are more likely to lead to the least-cost output than are service contracts in which compensation is not linked to revenues. Concessions may be preferable to lease contracts if large amounts of capital are required. In concessions, the private operator has an incentive to invest efficiently because it is responsible for recovering both current and capital costs. On the contrary, in lease contracts, the lessee who is responsible only for current cost may influence the public owner of the assets to make excessive investments in order to reduce the operating cost. BOOT contracts involve gradual transfer to the public authority or the private contractor in the future; they can be a useful transitional approach in a country such as Albania where the private sector has not had any previous role in providing water services. Joint ownership or mixed companies can reduce risks and attract private sector involvement more easily. Full privatization by selling assets or floating shares on the stock market is the most advanced option, but it is not widely used in the water sector. Table 2.9.2 below, summarizes the eight options for PSP with emphasis on the ownership and financing of fixed assets and on the management of the system. Table 2.9.2: Comparison of PSP options

Option Service contract Management contract Lease Concession BOOT Reverse BOOT Joint ownership Outright sale Ownership Public Public Public Public Private, then public Public, then private Private and public Private Financing Public Public Public Private Private Public Private and public Private Management Public, some private Private Private Private Private Private Private and public Private

Table 2.9.3 provides a summary comparison of the four PSP options in which ownership remains with the public sector: service, management, lease, and concession contract. It shows the sharing responsibilities between public and private sector, with respect to financing of investments and working capital, as well as relation with the consumer and the setting of rates. The private capital needed, the private sector responsibility and autonomy grow from low to high in the options compared.

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Table 2.9.3: Main features of PSP options with public ownership

Features: PSP with public ownership Financing of investments Financing of working capital Contractual relation with customer Service contract Management contract Public sector Public sector Private sector on behalf of public sect. .......> .......> .......> 3-5 Public sector Cost-plus and productivity bonus Rates Improve operating efficiency Lease contract Public sector Private sector Private sector .......> .......> .......> 5-10 Contract Basic rates Concession contract Private sector Private sector Private sector ....... High ....... High ....... High 20-30 Contract Rates

Public sector

Public sector Public sector Low ......> Low ......> Low ......> 1-2 Public sector Work done - unit price, lump sum Rates Improve operati. efficiency

PS responsibility and autonomy

Need for private capital Financial risk Duration (years) Responsibility for setting rates

Method of payment

Method of recovering public expenditures Main objective of PSP

User overcharge Not applicable

Improve operating efficiency Mobilize private capital

D. Main Elements of Success and Obstacles to PSP and Risks Involved The two main objectives of the public sector with respect to private sector participation are to expand the water supply coverage to the increasing population and to provide better quality of services. Secondary objectives are to ensure higher operating efficiency and finance without or with limited public subsidies or guarantees. The most suitable PSP option should be selected in each case and it must take into account political, legal, and cultural implications of the country involved as well as institutional, financial, and technical characteristics of the water systems. The public sector must be able to supervise contracts with private sector; such contracts must have realistic targets and resist time. Experienced advisors (technical, financial, and legal) are necessary and must be retained by the local governments. Some of the main obstacles to private sector participation are related to bureaucracy, lack of adequate legislation, resistance to what is perceived as loss of control, lack of confidence in the private sector, lack of interest on the part of private sector, unfavorable public opinion, etc. Some of these obstacles can be overcome by procuring the services through a fair and transparent bidding and award process.

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There are two risks for the public agency: the risk that services provided by the private sector are not of the required standards, and the risk that cost of such services will be higher than that charged by the public entity. The risks for the private investor include: Commercial risks are those that the private investor will not be able to recover cost in the long term or make a reasonable profit. The demand for services may be lower than assumed. The private investor may not be paid for his services at all times. Financial risks are related to currency devaluation and convertibility of local to foreign currency. In fact, revenues will be in local currency and part of investment and borrowings will be in foreign currency. Technical risks are related to lack of sufficient knowledge about the state of installations, rehabilitation, expansion, and the resulting operational risk that the installation will not perform as required. Another risk is that construction cost will rises up due to eventual delays in the construction timetable. Legal and political risks are related to the ways in which contractual disputes are solved. The political risks are that government may expropriate the assets or change its policy towards privatization in the future. In addition, the hesitation of the government to raise tariffs, especially before elections, is another political risk. Box 2.9.2: Private sector participation in the world Service contracts have e.g., been successfully used in Chile. Contracts for meter reading, billing, maintenance and vehicle leasing are awarded by competitive bidding for one to two years.

Management contracts, traditionally used in France and Spain, have been recently introduced in Guinea-Bissau and Mexico. Lease contracts have been extensively used in France and Spain and are presently used in Bolivia, Côte d'Ivoire, Gambia and Guinea. Concession contracts have been recently used in Argentina, Chile, and Côte d'Ivoire. In Latin America, examples of BOTs or BOOTs in the water sector can be found mostly in Mexico. Chile plans to use BOT arrangements to contract construction and operation of major wastewater treatment plants. In Australia and Malaysia, BOOT arrangements are used for the construction of large water treatment plants. Cases of joint ownership can be found in France, Guinea, and Spain. The most significant example of full privatization of water supply and sanitation is that of the United Kingdom, where the 10 major water companies were privatized in 1989 through the sale of shares to private investors in the stock market. A special regulatory body (OFWAT) was created to protect

E. PSP in Albania The GoA has applied a new policy in regard to the PSP in water sector. This policy has been supported by donors like the World Bank and KFW. Both donors consider PSP as a key element of urban water sector reform and promote the handing over of utility management and operation responsibilities to a professional private operator. KFW has supported the management contract approach in Kavaja city and a concession contract in Elbasan city, which are still at early stage. The World Bank has assisted the GoA to recruit a reputable private company through a

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management contract for four important cities, Durres, Fier, Lezhe and Saranda. The main objective is to improve water supply and sanitation services in the four participating cities and achieve financial viability in their water utilities, by introducing a new incentive-based multi-city management contract approach. The Bank and the GoA will draw from the experience the local government, and companies will gain from the implementation of the management contract. The Government will monitor closely the process of PSP in the sector and is committed to expand the PSP contracts in the sector should the opportunity arises. F. The Albanian Private Sector as Service Deliverer in the Water Sector Up to know there is almost no experience of the Albanian private sector to deliver services in the water sector, despite limited service contracts. However, the experience in other countries, especially in Latin America shows that the domestic private sector can have an important role to play. In Paraguay, a country that has not much more inhabitants than Albania, about 400 small entrepreneurs ­ called aguateros - are providing water supply services. The main message which emerges from the experience in Latin America is that water supply business in the developing world can be profitable for domestic entrepreneurs, provided that appropriate legislation is enacted to encourage the domestic private sector to invest in the provision of water services. Most of Albania's medium size and small towns will not be able to attract the foreign private sector, much less will the rural areas. Therefore the Government is dedicated to learn from the experience in Latin America and will take steps to foster the development of Albanian service providers. This is a very promising approach given the strong entrepreneurship found in Albania.

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2.10 ESTABLISHING REALISTIC STANDARDS IN DESIGN AND SERVICE PROVISION 2.10.1 Customer service standards and design criteria It has become apparent that donor-funding agencies contributing to the water sector in Albania operate quite often with different parameters in respect of design and construction. Obviously, these parameters are related to the national standards of the donor agency and their suitability for the specific conditions in Albania is often doubtful. The use of different parameters may lead to: Considerable variations in the level of service provided, which may have political implications Considerable variations in cost for projects of a similar nature Uncertainty among implementing agencies and beneficiaries in dealing with unfamiliar parameters during implementation, as well as operation and maintenance.

To overcome these variations, it is clear that there is an urgent need to develop standard design and construction parameters for the water sector in Albania, given that the existing Albanian standards date back from the 1978 and are largely outdated. Development of water sector parameters is dependent, in part, on policies in the water and sanitation sector that should be defined at national level. Important policy decisions are required in respect of, but not limited to: Level of service provided to urban, rural, industrial, and other types of consumers in terms of hours of water availability per day, water quality, and pressure. This is a delicate issue as 24-hour water availability and suitable pressures are desirable goals, but making them mandatory would require enormous financial resources, which are not likely to be available in Albania yet for some decades. Definition of effluent discharge standards, eco-taxes, and related remedial actions. These issues should be addressed rapidly because the environment is steadily deteriorating in Albania and environmental rehabilitation is expected to be costly.

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Standard design and construction parameters can be grouped in the following categories: Planning horizon and design life. Currently, Albania is considered as an emergency case, in terms of dilapidated water infrastructure and the type of donors' assistance. This has led to short- and medium-term response activities in the water sector, resulting in planning horizons ranging from 2 to 20 years. As development projects, rather than merely emergency ones are envisaged for the water sector, it becomes necessary that planning horizons change accordingly. A planning horizon of 20 years seems appropriate under the Albanian conditions. However, it is important that short-, medium-, and longterm planning horizons complement each other in a way that short- and medium-term works fit within long-term ones. Waterworks are designed for a period of 20-25 years; however, it is not unusual that such facilities, especially pipes, remain in use for 40-50 or even more years. Mechanical/electrical devices have a design life of 10-15 years; beyond this period they become obsolete and it is not cost effective to operate and maintain them. Design criteria. There is need for development and standardization of design criteria in urban and rural context. Typical design criteria for water supply should include, but are not limited to:

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Per capita consumption Drinking water quality Growth factors Peak flow factors Minimum reserve storage Fire-fighting flows Acceptable level of unaccounted for water, etc.

Typical design criteria for wastewater should include, but are not limited to: - Contribution of water supply to wastewater - Growth factors - Peak flow factors in relation to dry and wet weather - Effluent quality, etc. Even though most of these design criteria are defined in the 1978 standards [19], there is a need for considerable updating, especially in relation to water consumption and leakage. Pilot projects in urban and rural areas should be implemented in order to receive basic information from which water and wastewater design criteria can be more accurately developed. Design standards. Allowing foreign consultants to use their own design standards has resulted in a multitude of different standards in water supply and sanitation. For reasons of uniformity, standard design features should be developed and approved in Albania. These should include, but not be limited to: - Materials, especially for pipes and fittings - Depth of cover to pipes - Road and stream crossings - Control gauges (mechanical, electrical, electronic, etc.) - Valves and manholes - Water treatment processes/technologies - Safety measures in water and sanitation facilities, etc. Tender documentation. The legal framework in Albania has defined tender procedures clearly and in similarity with advanced western practices. Tender processes for procurement of goods and services can ensure transparency and fairness as long as corruptive behavior of their organizers does not compromise the process. Where relevant, and particularly in respect of materials, the technical specifications should refer to appropriate standards and codes of practice. International standards (ISO, DIN, etc.) should be adopted, provided they relate to Albanian conditions. Implementation controls. Standard parameters and documentation for inspecting and monitoring the progress of the works are essential for consistent interpretation of contracts. While application of new technologies in water supply has recently improved, particular attention should be paid to supervision, which, for different reasons is not often not properly done. The development of standard documentation for use by the supervision professionals should include: - Monthly report - Agenda and minutes of site meetings - Interim payment certificates - Variation orders - Taking-over certificate - Defects liability certificate

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Final payment certificate Site instructions Daily site record Request for information Request for inspection/tests Quality assurance dossier.

After their initial development, the refinement of standard design and construction parameters is an ongoing exercise based on the experience gained from each project. On completion of contracts, an appraisal of the strengths and weaknesses in the documentation should be carried out. Such an appraisal will enrich design details of future projects. 2.10.2 Quality standards for drinking water and effluent discharge ­ Definition of quality monitoring systems It is no small task to strive for ecologically sound and rational management of water resources, including the prevention, control, and reduction of water pollution. Any such policy has to start with a complete definition of quality standards for drinking water and effluent discharge. The Albanian quality standards of drinking water are an expression of advanced European and WHO guidelines. Their application is mandatory since 1998 when the previous standards were abolished. The observed stringency of these standards is appreciable as it gives the possibility to ensure drinking water safety in the long term, without having to update them significantly in the near future. However, the generally obsolete treatment technology available in Albania makes the compliance with some parameters difficult. Apparently, quality control structures, such as the Sanitary Inspectorate are somewhat flexible in demanding compliance with those parameters most difficult to be achieved by the current treatment processes. In Albania, the effluent standards were set in 1974. The Ministry of Health provided these standards as temporary standards and, in fact, they never became permanent ones. Presently, the Ministry of the Environment is preparing new standards according to the European Directive of 1991 for urban wastewater effluents. Monitoring of drinking water and wastewater quality is the responsibility of the State Sanitary Inspectorate. Unfortunately, monitoring of wastewater quality is almost completely neglected and studies on the impact of effluents on the environment are very scarce. The process of water quality monitoring and assessment should not be considered as a simple compliance with the guidelines. It has to be understood as a sequence of interrelated activities starting with the identification of information needs, and ending with the use of the information product. The quality monitoring process consists mainly of five clusters: Water administration: ­ This includes setting priorities on water use, detection of problem issues, and potential threats to water quality, decisions on water policy and implementation measures. This requires an awareness of water quality issues from the users' points of view to decision-makers. It should be noted that these priorities and decisions are evolving with time and with socioeconomic development, changes in landuse, urban growth and industrial expansion.

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Monitoring strategy: ­ Basic criteria in the adoption of a suitable approach have to be defined, while choices range from labor-intensive sampling programs to technologyintensive monitoring equipment. Two typical approaches to quality monitoring are: - Monitoring of drinking water production, storage and supply operations undertaken by a licensed service provider - Monitoring of effluent discharge that has been authorized under certain conditions in a permit or license issued by a regulatory agency. The definition of a monitoring network for both drinking water and effluent discharge is a dynamic process of setting monitoring spots based on a number of previously set criteria. The latter should take into account factors such as the population density, sources of pollution/effluent discharge, important steps of a treatment/distribution process, i.e., intake, mains, network endpoints, etc. [9] The sampling frequency should be determined based on the temporal and spatial variability of water quality or effluent discharge, as well as in view of the objectives of the monitoring program. The selection of monitoring variables is based upon the intended water uses, potential water/wastewater quality issues, and the expected occurrence of harmful contaminants. Availability and affordability of analytical methods and laboratory capacities is a complementary consideration in the choice of variables. With time, the list of variables has to be adjusted according to the expanded knowledge of the water/wastewater quality and the development of new measuring techniques [12]. Monitoring procedures: ­ The methods for sampling and analysis have to be standardized to the extent possible. Major errors can be introduced by collecting samples that are not representative of the quality of water/wastewater at the time and location of the sampling process. Analytical methods have to be validated, described in detail and laboratory staff be trained in their use. Performance should be checked regularly, especially through inter-laboratory comparison studies. Data management: ­ This process requires access of the laboratories to a computerized network and a central processing unit. Unfortunately, given the destruction and occupation by squatters of many district laboratories around Albania, this process cannot be established unless analytical capacities are properly restored. A pilot project in the field of epidemiology is underway and apparently, it is bringing good results. When this becomes a reality, data management should consist of data validation prior to the entry in the system. The conversion of data into information would involve statistical analysis and interpretation, such as averages, peaks and lows, trends, pollution load calculation, flux estimates, etc. Reporting of this information should be presented in relation to monitoring objectives and in easy-to-read format. This would facilitate the use by the policy-makers or interested groups. Institutional arrangements: ­ the formulation and implementation of strategies for water/wastewater monitoring rely significantly upon sound institutional arrangements. This should include organizational structures in the district and as well as in the central coordinating level. This should be embedded in an overall monitoring strategy and action program. With regard to monitoring and assessment, the central unit should function as a forum for information exchange and for preparing proposals for joint research and development. The unit should also deal with the following issues: - Collection, compilation and evaluation of data - Drawing up of joint monitoring programs for water/effluent quality

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Establishment of inventories and exchange of information on pollution sources Setting of emission limits for effluent discharges Evaluation of the effectiveness of pollution control programs Establishment of warning and alarm procedures.

It is useful to establish a technical working group and a scientific advisory panel to assist the unit in fulfilling its role in an effective manner. Commonly agreed procedures for cooperation should be established, including rule-making process, implementation practices, participation in the joint institutional structures, etc. This cooperation has to be based upon confidence and consensus building, a process that may take considerable time. In this regard, a phased approach to cooperation seems most promising. The above-mentioned concepts on the definition of the strategy on quality monitoring can be presented schematically in the following diagram: Figure 2.10.1: The monitoring cycle

Water administration

Information needs

Information utilization

Monitoring strategy

Reporting

Network design

Data analysis

Sample collection

Laboratory analysis

Data handling

Source: UN/ECE

2.10.3 Enforcing compliance with standards Approval of appropriate standards in design and service provision, as well as with regard to the quality of the final product is not enough to ensure safety and integrity of the service. Approval of the standards should be followed by their application in practice and this process goes through efficient enforcement. The following actions are necessary: Improvement of the legal framework governing the enforcement process and allocation of clear competencies and responsibilities to the institutions assigned for quality control and monitoring of the compliance with standards

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Strengthening of the inspection bodies with both, financing and qualified personnel, upgrading their skills through regular training Support through other structures such as the judiciary and the police forces. With regard to the compliance with standards for drinking water quality and disposal of wastewater, there are historical structures in place, such as the State Sanitary Inspectorate. Presently, it is necessary that the analytical capacities of these structures in the districts are upgraded, and training be performed on a regular basis. At the same time, support from other enforcement structures should not come less. There should be an efficient system established for the collection of fines and the application of sanctions imposed by the Sanitary Inspectorate to those who do not comply with the standards.

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2.11 BUILDING CAPACITIES AT GOVERNMENTAL AND OPERATIONAL LEVELS 2.11.1. Enabling local governments to address reform challenges Albania has relatively little experience with democracy and reforms, which date back only a decade. The decentralization strategy of the Government places a key role at the local government levels by transferring responsibilities and competencies to municipalities and communes in water and sanitation services. This process is difficult and very complex due to the excessive politicization of the activity of local governments and the resistance of some central government organizations to delegate as the law stipulates. Local governments fear to take over utilities which are very dilapidated and full of debts, and put pressure on the central government to rehabilitate the networks and write off the debts. The central government fear of losing power and is concerned about the lack of capacity at local levels. This leads to a certain adherence to the status quo. Substantial reform changes, as those currently underway in the water sector, will require a higher responsiveness and commitment to reform challenges especially at the local level. Local officials should be proactive and take initiatives to take over new responsibilities, and not perceive the reform as a threat to their `survival' but as a process of transformation that will enable them to perform better and provide quality services for their populations. The Central Government should understand the difficulties and obstacles at the local level and continue to provide financial resources and speed up the required institutional and legal changes to make the implementation of the decentralization as smooth as possible, and prevent the collapse of basic public services. In addition there should be a defined a training program in management of services and investment planning for local officials involved in service provision. This process should be facilitated by different structures of the central government, such as the Ministry of Territorial Adjustment and Tourism, Ministry of Local Government, Ministry of Finance, etc. A subject of particular interest should be the private sector participation in service provision ­ clarifying this delicate issue would help dissipate unrealistic viewpoints varying from lack of trust to excessive expectations on the privates sector. 2.11.2 Enabling water utilities to act in a business-like manner The water utilities have over-relied on government subsidies for several decades, and their performance in terms of coverage and quality of service has been minimal. Planning and other important decisions were centralized and utilities' management was responsible only for the daily operations and basic maintenance. Presently, water utilities lack a professional customer care service and are understaffed and under-trained at managerial level and overstaffed at technical level. In addition, the companies remain with undeveloped accounting systems, lack of computerized billing and collection processes, lack of computer modeling of water systems and operations, and poor investment planning and decision-making. Enabling water utilities to act in a business-like manner is a difficult and long process that should be developed through a number of training programs geared to improve the organizational structures and reshaped functions of staff positions. Important fields for training are in accounting, management, expenditure forecasting, investment planning and prioritization, contracting services, etc. Accounting staff should be trained and develop practical skills in a new upgraded accounting systems, billing and collection, bookkeeping, etc. Technical staff should get acquaintance with optimization of operations, maintenance, leakage detection and control, meter installation, use of new technologies, etc. In these programs, the Ministry of Territorial

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Adjustment and Tourism will play an important role as facilitator in cooperation with the water utility association and donors' community in Albania. 2.11.3 Training in capacity building and support of water professional associations The issues above led to an important question. Who is going to conduct these trainings? In the present situation, relatively little is being done in this direction. NGOs and some foreign donors are involved in technical assistance to local governments and water utilities, but often, the number of topics covered is small and quality and benefits of the training processes are of little impact. In addition, there is scarce coordination among donors/NGOs and sometimes this means uninformed decisions that may not be targeting the real problems. An insufficient knowledge of the Albanian situation is a reason that would require a substantial involvement of the Albanian professionals in the development of training curricula and in the training process itself. This could go through two phases: (a) strengthening of the existing Albanian Association of Water and Wastewater Utilities (AAWWU) and development of specific training programs by the AAWWU with the line Ministries acting as facilitators; (b) implementation of the training process for local governments and all water utilities. WUA should be financially supported by the central Government and donors, based on the extent of AAWWU's involvement and capacities in place. For this process to be effective, the Central Government and foreign donors should channel their technical assistance and funding of the training program through a special management board at the Central level (most likely at the line Ministry). The following diagram illustrates this training process: Figure 2.11.1: Training in capacity building and actors involved

Ministry of Territorial Adjust. & Tourism

Ministry of Local Gov.

Ministry of Public Economy & Privatiz.

Ministry of Finance

Ministry of Health

Water Professional Associations

Donor Community

Phase 1: Development of training materials

Phase 2: Implementation of training programs Water Utilities Local Governments

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The AAWWU has already established a good collaboration with central and local governments and is committed toward capacity-building, exchange of information and experience among water utilities. However, there is a multitude of arrangements possible and similar associations of small and medium size may be created in the future.

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2.12 FOSTERING EFFICIENCY AND ENVIRONMENTAL SUSTAINABILITY IN THE WATER SECTOR 2.12.1 Development of a water resources management plan Since 1987, planners in many countries have embraced sustainable development as the leading philosophy that on one hand would allow the world to develop and on the other hand preserve non-renewable resources and guarantee adequate living conditions for future generation. If ever the theory of sustainable development can be put into practice, the role of water in this process is crucial. As the awareness of people and decision-makers in water issues is small, it is worthy to highlight that some elements of sustainability are obtained through the following processes: Planning in water resources management: By definition, this is the development and allocation of a resource matching water availability and demand, taking into account the set of national/local objectives, constraints and the interests of stakeholders. Based on the Albanian peculiarities, a distinction according to the scope of the planning would define the following: - Functional planning: Planning to meet specific needs within the sector, such as prevention of groundwater pollution, reduction of water wastage, etc. - Sectoral planning: Integrated planning for all functions within one sector - Multisectoral planning: Coordinated planning for several sectors of public endeavor, such as land use, water resources, effluent disposal, irrigation, etc. A distinction according to the spatial extent of planning would include: - National plan: This is made to define the national priorities for the allocation of water resources in view of the national objectives and constraints. - Regional/local plan: This kind of planning does not differ from the national one. - Basin plan: This is a particular plan because it uses the hydrological/hydrogeological boundaries as the planning limits; in principle it should be a multipurpose and integrated plan. Another distinction can be made with regard to the timeframe of the planning process: - Short-term planning: It has the advantage that the uncertainties are small, but this kind of planning may lack a vision on future developments. - Long-term planning: It has the large disadvantage of uncertainties, thus, shortterm planning is becoming gradually more important than long-term planning. The latter can be reduced to a long-term policy in which the short-term plan should leave open a wide range of options that may lead to the ultimate goal. - Strategic planning: It tries to be a combination of the ones mentioned above and it focuses on the short-term while leaving opened a wide range of future options. - Rolling (cyclic) planning: The problem with the strategic planning is that it is fit for somewhat static situations. When continuous updating and adjustment to ever changing circumstances is done, this is known as cyclic planning (figure 2.12.1). Involvement of stakeholders: Proper functioning of water resources system, at national or local level, requires the commitment of all involved parties to make the system work. The only plan that will actually work is a plan based on the deep involvement of the relevant stakeholders, leading to a compromise or consensus on design and implementation. Certainly, it is difficult to create the institutional setting in such a way that water resources development is sustained by the vast majority of the people. The answer to this problem lies in the involvement of stakeholders. The cyclic planning approach given in

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figure 2.12.1 offers many opportunities for involvement. In such approach, after the completion of a cycle, the results are presented to the stakeholders for a decision. Figure 2.12.1: Cyclic planning approach

Inception Mid-term Draft final Master plan

Strategy

Alternatives

Strategy

Alternatives

Strategy

Alternatives

Performance Design

Analysis

Performance Design

Analysis

Performance Design

Analysis

This ensures that stakeholders participate in the decision process at an early stage and that they can have an influence on the course of action. Consequently, this creates the basis for commitment. Peoples' participation: The experience shows that many water resources management projects, although technically and economically successful, have enlarged inequality and failed to reach the poor and most importantly failed to be sustainable in the long term. Some of the most suspected reasons [24] are: - People do not see the benefits. Social impacts and the distribution of benefits were not taken into account when projects were proposed. This situation is a real failure in development projects. If the project does not affect peoples' lives positively, technical and economical success is of no value. - People have no incentive for operation if they were not committed from the beginning to the project ideas, or to bearing the responsibility of management. Peoples' participation in planning and implementation of water projects is an important prerequisite to avoid such problems and lack of such participation should be regarded as one of the main reasons for their failure in Albania. Thus, a water resources management strategy can be sustainable if it has the support of a broad base of stakeholders, thereby opening up the possibilities both to strengthen local institutions and people's organizations and to develop selfreliance and confidence. A sustainable management of water resources should be regarded as fully integrated with the protection of the environment, and both should aim at contributing to sustainable development. Given the critical state of the environment in Albania, it is realistic to envisage that the short- and medium-term objectives should be to: (i) reduce/stop the process of environmental degradation; (ii) create conditions for the rehabilitation of polluted areas and bring them within minimal security standards; (iii) increase the sustainable use of environmental resources. The interventions in the environment should be given priority in those areas where there is a high level of human exposure to environmental risk, considerable values/assets are endangered, and where the damage has a greater impact on the poor. Priority measures should include:

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Institutional strengthening. Attention should focus on the increasing capacity in the Ministry of Environment, at the municipal units, which have environmental protection responsibilities, and other organizations involved in the field of environmental protection. Two important aspects can be distinguished here: - Increasing the awareness among local communities, the civil society, the business community, etc. and involving them in the decision-making processes. One of the typical examples of the participatory approach application, is the public consultation process with broad audience regarding the proposed constructed treatment wetland in Durres, Lezhe and Saranda. The consultation process lasted about six months during the first half of 2003 and included many meetings involving central and local government officials, environmental NGOs, professors and academicians, civil society, and communities in the project area. - Capacity building, especially at local level and delegation of increased competencies in environmental monitoring and protection. The adoption of environmental policies and instruments. Strategic plans and action plans should be prepared with regard to urban and rural development, use of resources, land use, transport, agriculture, etc. The implementation of these policies should be supported by the establishment of instruments such as fees/taxes and the strict compliance with standards on discharges and environmental quality. Compensatory policies should be applied to minimize the burden of cost or the adverse effects of environmental policies on the poor. The reduction of pollution from existing sources. Attention should be focused on sources of pollution close to inhabited areas that cause considerable damage to economic values or undermine development, having most of the impact on the poor. The interventions should start from the environmental `hot spots' and should aim at reducing historical and on-going pollution and elimination of toxic components. It is crucial that efforts be made to combine policies that increase the motivation for a rational utilization of resources with measures that increase management capacities and enhance accountability. Protection of the Managed Protected Areas. The Council of Ministers has approved in May 2003 the decree on regulating the categories of the protected areas based on the IUCN categories including the transferring of the "Hunting Reserves" into "Managed Reserves." The approval of the Law on protected areas made a step forward towards the integrated protection approach and obligates the establishment of an administrative entity for each "Managed Reserve." The administrative units will consist of members from central and local government, and from environmental NGOs. Another development is the increased awareness to protect wild animals and birds through various decisions, such as of the recent decision of General Directorate of Forestry and Pastures to prohibit the hunting in the Kune-Vain Wetland. However, the capacity for enforcement is still weak, and needs assistance and resources for enhancing. Monitoring and Environmental Management Plan. The Ministry of Environment is increasing capacity to exercise monitoring of the activities in the managed protected areas, such as of the Kune-Vain Wetland and to produce a monitoring plan. Also, with the assistance of the World Bank, the Ministry of Environment is developing capacity to prepare the Environmental Management Plan for Kune-Vain Wetland.

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In conclusion, the use of technologies on one side and peoples' aspiration for development on the other should associate with the use of environmental resources in such a way that only sustainable solutions are accepted and achieved. Figure 2.12.2 illustrates this interaction [34]. Figure 2.12.2: Toward sustainable solutions

Effectiveness Environment SUSTAINABLE SOLUTIONS Health risks Level of service Technology

Community

Source: Tahal Consulting, Ltd.

2.12.2. Benchmarking water utilities' performance The establishment of a benchmarking baseline and a reporting indicator system is crucial to monitor the performance of the sector and link it to investment decision-making and assistance. This gives the possibility to compare the performance of different utilities and see the dynamics and trends over time. Access to comparative information will support the development of wellrun companies by providing key policy-makers with the information they need to benchmark sector performance. Also, it will be a very useful tools for all stakeholders, such as: Managers ­ to identify areas for improvements and adopt realistic targets Central and local governments ­ to monitor and adjust sector policies and programs, share the best experience within the country Regulator ­ to ensure that customers get service according to standards and that suppliers have incentives to perform by being financially viable Customers ­ to increase awareness, develop community responsibility and exert pressure to both, the authorities and the supplier for a better service Donors ­ to identify needs and develop the assistance and support accordingly. Private Investors ­ to explore viable markets and opportunities for profitable business.

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Which set of indicators would be the most appropriate? Government's overall policy objectives in the sector are to ensure safety and quality of water, increase the access to the piped water and sewerage service and establish the financial viability of the utilities. In this framework, it is recommendable that the indicators encompass coverage, production and consumption, water quality, unaccounted water, metering, personnel productivity, service quality, billing and collection, and financial performance (see table 2.12.1). Table 2.12.1: Water utilities' performance indicators

Indicators

- Coverage Indicators Drinking water coverage Sewerage coverage - Water Consumption and Production Water production Water consumption Metered water consumption - Unaccounted for Water - Metering

Unit

% % L/c.d. L/c.d. L/c.d. % % % No./1000 No./1000 Hours/day Lek/m3 Lek/m3 Lek/m3 Lek/m3 % % Compliance with standards Source: MoTAT

Proportion of metered connections

Proportion of sold water that is metered - Personnel productivity Indicator Employee per 1000 water connections Employee per 1000 served inhabitants - Quality of Service Continuity of service - Billing and Collection Domestic tariff Industrial tariff Public Institutions tariff Commercial tariff Collection rate - Financial Performance Working Ratio - Water Quality

The Government should also consider introducing cross-references with other public services for some key indicators. Such cross-references would allow the Government to compare progress between the water sector and other sectors. Willingness to pay and revenue collection are important features on the transition to cost recovery and more information on such features could provide a better picture. The most useful cross-references would be between the water sector and the energy sector, given that both face similar problems and have comparable indicators with regard to supply, losses, tariffs, metering, billing, collection rate and overall performance. Comparisons with other sectors, such as telecommunications would not provide the same useful information. Because of the very different nature of telecommunications where capital investments, staffing levels, and easy disconnection practices allow for much higher cost recovery, such comparison would have a limited scope.

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The degree of detailing of indicators will vary among different stakeholders. Policy makers at central level are looking for highly aggregated information and a set of core data throughout the country would be more appropriate to collect and maintain at central level. Policy makers and decision takers at the municipality and commune would need more disaggregated information at the district and region level, while utility managers want to see daily activity performance. Therefore, each of the above players ­ central/local government and utility managers should build their own monitoring capacities and make their data available. 2.12.3 Development of a national database system A difficult flow of information in the water sector can be attributed, in part, to the total absence of a computerized national database system. The information about the water supply and sewerage networks is archived at the utilities as hard copies and part of it went damaged or lost. Thus, often there is no information at all about certain parts of the networks and retired utilities' technicians are recalled to assist with the location of pipelines and valve chambers. This lack of information consists a major obstacle in optimizing service parameters and renovating/extending networks. The second issue is related to the financial performance of each water utility. This information is sent to the central government by almost all utilities, more or less regularly. The feedback from the government and the comparison of performance data among water utilities is often scarce. The third issue has to do with information on the quality of the service provided to customers and the compliance with the national water standards. These data are provided to the Ministry of Health by the Institute of Public Health after being collected by the Sanitary Inspectorate offices in the districts. Still there is a scarce feedback of information to the water utilities on the quality of their product and comparison of results among utilities. Moreover, the formats used for reporting are not representative of the real situation and useless for statistical calculation. With regard to the financial performance of the water utilities, an efficient national database system would require: - Provision of computers and printers in all water utilities - Possibility for internet connection with a Data Processing Unit (DPU) at central level, which could be located at the Ministry of Territorial Adjustment and Tourism. - Reporting according to standard forms, which should be electronically workable - Data elaboration at DPU, feedback of information, and publication of performance parameters for the general public. With regard to the quality of the water produced by each water utility, the same principles apply with the only difference that the collection of information and reporting should be done by the Sanitary Inspectorate offices and the dissemination of information by the Ministry of Health. A horizontal flow of information between the two line Ministries should be regularly carried out. This system should allow the local governments to participate actively in the process and use it as an important analysis and projection tool. This will prove particularly beneficial in those cases when the service provider is a private entity ­ company, concessionaire, etc. The water companies should start a census of all service provision facilities detailing, recording, and where possible, computerizing this information. Procedures regarding archiving and use of information should be revised to avoid damage and loss of documents. Old files should be rewritten and carefully preserved. A systematic reliance on electronic storage will facilitate the use of information and related decision-making processes. The development of a national

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database system should serve as the basis for the definition of an investment priority system according to the needs.

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2.13 INTERVENTIONS OF DONORS AND NGOs ­ DONOR COORDINATION MECHANISM This paragraph gives an overview of the main donors' assistance to Albania for the development of water and sanitation sector. The role of the donors' community in water sector has been very significant. The donors' assistance has been directed to the rehabilitation, new investments and technical assistance for capacity building at the utility level. Sector reform and policy design is another focus of donors' assistance, primarily provided by the World Bank. In Albania the most involved donors in water and sanitation are the World Bank, the German Government through KFW, the Italian Government through Italian Cooperation and the EU through the Phare Program and ECHO. Other donors such as, Austria, Norway and Development Islamic Bank are also contributing, but to a lesser degree. The overall objectives of the assistance during the transition phase has been to prevent the system from collapse through emergency intervention, and prepare institutions to adopt to the market oriented principles and rules. The new strategy objective of the Government and the EU is development oriented, i.e., to prepare the country to enter the EU family through the Stabilization and Association Agreement (SAA). To this end, the EU has prepared a new Country Strategy Paper for Albania, based on which the EU will focus in the institutional capacity building and environment and withdrew from capital investment assistance in the water and sanitation sector. The Italian Cooperation has funded important projects, such as building of the Bovilla reservoir as a new source for Tirana, a water treatment plant and a ring main around the city. Also, the Italian Cooperation is financing the TA for the Tirana Water Company restructuring, new management standards, and network rehabilitation investments. KfW has provided grants and soft loans for water and sanitation focusing on rehabilitation interventions and technical assistance to water utilities in nine towns of Albania. In parallel, the KFW is supporting the PSP in the water sector and has offered assistance for the capacity building of the water regulator (WRE). The World Bank assistance has evolved in water sector reform through the assistance for the preparation of the National Water Supply and Sanitation Strategy and the Rural Water Supply and Sanitation Strategy, and in investments rehabilitation with TA at company level. The World Bank has assisted the GoA to bring PSP into the water and sanitation sector, seen as a key instrument to bring rapid improvements with sustainable outcomes. ECHO has funded and worked with foreign NGOs in water projects in urban and rural context, focusing on covering poor areas with water services. Enabling `grassroots' participation and mobilizing beneficiaries have been a precondition for ECHO intervention. In fact, NGOs, working in water projects around the country, have been the most successful players in

mobilizing, empowering communities, and creating local management capacities.

Phare Program is committed to feasibility studies and upgrading of water and sanitation systems mostly in urban areas, such as Tirana, Fier, Gjirokaster, the tourist towns of Vlora, Saranda, etc.

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Figure 2.13.1: Donors' intervention in the water sector

Million Euro 80 70 60 50 40 30 20 10 0

W Kf n lia Ita n tio e ld or W Ba

Com mitte d Cont racte d Disb urse d

a er op Co

ar Ph

nk EC

HO

The donors' community in Albania has created a Sector Donors' coordination meeting with the GoA to coordinate efforts and avoid duplications, exchange information and update on each others' activities, to cooperate in overcoming obstacles, and to develop new approaches and policies. To a certain extent, the mechanism for coordination played a constructive role, although it suffers from lack of sector database and reliable information on the sector performance and periodic meetings. The Government's role as a focal point of donors' activity should be strengthened, and systematic information flow should be provided continuously. The Water Sector Donor Coordination Meeting has been organized once or twice a year moderated by the World Bank or European Commission. However, more contacts and efficient exchange of information are necessary, especially with regard to the nature and level of assistance provided, joint actions, integration of projects, etc.

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2.14

CONSULTATION PROCESS FOR THE WATER SUPPLY AND SANITATION STRATEGY

The World Bank assisted the Government in preparing the National Water Supply and Sanitation Strategy. In early 2003 when the first draft of the Strategy became available, the MoTAT organized consultation meetings with all key stakeholders in three phases. Phase one: consultation with central government organizations. The General Directorate of Water and Sanitation (GDWS) distributed the draft strategy to the Ministry of Finance, of Economy, of Agriculture, of Local Government and Decentralization, Justice, Health, Environment, the Water Regulatory Entity and the Technical Secretariat of the National Water Council. Written comments were received from all of them. Phase two: consultation with local governments and water utilities. The GDWS distributed the draft strategy to the Association of the Water Supply and Sewerage Enterprises of Albania, Municipalities and Communes. The GDWS organized a meeting with the representatives of the Association. Phase three: consultation with civil society and the donor community. With the assistance of Carter Center, the GDWS organized a discussion with representatives of relevant NGOs and donors at the Hotel Tirana International. Before the meeting the Minister of TAT distributed the draft Strategy to all donors involved in the water and sanitation sector in Albania and solicited their comments, such as EC/Phare Program, KFW, Italian Cooperation, World Bank, Austrian Cooperation, and Norwegian Development Agency. The MoTAT received valuable comments and suggestions, which have been taken into consideration and incorporated in the final draft. Throughout this consultation process the World Bank team participated in consultation meetings the MoTAT conducted with representatives from a number of different line ministries. The MoTAT intends to send the final draft of the Strategy to the Inter-ministerial Committee for Economic Policies for discussions and following that, to the Council of the Ministers for approval. After the approval of the Strategy, the Government intends to present the final Strategy and discuss the implementation of the Action Plan at an international donor conference. KfW has already offered to host this conference in Frankfurt, Germany.

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2.15 MAIN ISSUES OF THE WATER AND SANITATION SECTOR IN ALBANIA

Based on the analysis of the current status of Albania's Water Supply and Sanitation Sector, the following main fields for sector reform have been identified:

Demand Management Demand management is identified as one of the key elements to improve water supply services in Albania and increase the revenue generation for the company. Experience shows that in areas where pipes are under pressure for 24 hours per day, water consumption goes up to 500 l/capita per day, compared to 120 l/capita per day in other European countries. Not only does this impose high operation cost on the systems, but also the water withdrawn by these customers is increasing the lack of water in other parts of the network. The most important tool in demand management is the introduction of metering accompanied by a water tariff based on the amount of water consumed, which should at least gradually reflect the true cost of the service. Other important tools for demand management are: efficient tariff collection, and disconnection of illegal and nonpaying customer. Legal and Institutional Framework From 1992 onwards there has been a process of gradual improvement of the existing legal and institutional framework. A number of laws have been approved aiming to provide the legal basis for the decentralization of authority to local level and to restructure the water sector for a better performance. Despite important results achieved, many issues still need to be addressed: (i) the assigning of administrative, service, and regulatory powers to the local governments is not completed as some bylaws are still missing; (ii) institutional structures such as the Ministry of Environment and the Sanitary Inspectorate which have important monitoring, enforcement, and regulatory role, are facing severe problems of understaffing, lack of financial resources, and difficult enforcement practices; and (iii) the important support the Water Regulatory Entity could provide can not fully materialize because of some deformation of his role and lack of capacity. The Statute of the water company establishes the obligations of the company, as well as the rights and duties of the Supervisory Board. The Supervisory Boards are still dominated by representatives from the Central Government, who prevent local government from taking ownership for water and sanitation services at the local level. Service agreements between the local authorities and the water companies establishing the obligations and performance criteria of the water company on one side and the rights and responsibilities of the local authorities on the other, are not in place. These service agreements are of special importance because most of the water companies in Albania are regional companies, which cover several municipalities and communes. Financial Sustainability of the Water Utilities and Governmental Subsidies In the last 10 years, water utilities have been struggling to cope with the system changes in Albania ­ from central planning to a liberalized market economy. Even though progress has been achieved, water utilities' performance remains poor. Most utilities cannot recover the cost of operations and rely considerably on subsidies from the central government. Most of these subsidies are not provided in a direct and transparent manner, but through arrears towards governmental institutions and state enterprises, mainly KESH, the national state-owned energy

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company. Lack of enforcement toward nonpaying customers, water tariffs well below cost recovery levels, massive leakage, and a widespread occurrence of illegal connections has led to this difficult financial situation for the water utilities. The revenue stream of the companies needs to be improved substantially and the subsidies from the Central Government have to be provided in a transparent manner linked to the needs and performance of the companies. Serving the poor The existing low tariffs, which do not allow the utilities to cover their operation and maintenance cost makes substantial increases in tariffs inevitable. Although water services will continue to remain highly affordable for the fast majority of the customers, it may become unaffordable for the extreme poor. The increased tariffs accompanied by a stricter enforcement policy towards nonpaying customer should not exclude the poor from receiving improved services. Private Sector Participation (PSP) Introduction of private sector participation in service provision is expected to improve the management of the water utilities and thereby achieve better quality of service and higher operating efficiency. In addition, private sector participation can also provide much needed capital for infrastructure rehabilitation and extension, although the conditions in Albania have not reached a level yet where private capital could be attracted on a larger scale. The most suitable PSP option should be selected in each case and it must take into account political, legal, institutional, financial, as well as technical characteristics of the water systems. Albania has many small towns, which are not attractive to foreign operators because of their limited size; bundling of towns and developing a market for domestic operators could help to overcome this obstacle. Monitoring and Benchmarking The Government of Albania lacks a reliable overview of the performance of the water supply and sanitation sector. Data is only collected on an ad hoc base, not comprehensive and seldom checked. Data collection is very much limited to urban areas which are served by regional water utilities. To stir sector reform and measure its impact on all customer, but especially on the poor, it is essential that proper monitoring and benchmarking is introduced, including monitoring the rural areas. The monitoring should include the indicators for achieving the sector's Millennium Development Goals and other indicators of the National Strategy for Socio-Economic Development (NSSED) as well as cross-cutting indicators from other sectors, such as health. Benchmarking of water utilities' performance is an important tool to promote competition among companies to perform better and provides local governments with a tool to judge the performance of their own company. Public Awareness and Communication Program The amount of information and awareness of the public regarding water and sanitation issues is not sufficient. Many customers still find it strange to pay for drinking water, while most have never heard of paying for wastewater treatment. There is a widespread attitude of in-house drinking water wastage and misuse for irrigation. This lack of awareness explains in part the difficulties in tariff collection and widespread illegal consumption. However, it is encouraging to see that in recent years there is a mobilization in parts of the civil society, media, and NGOs for the development of a general awareness. The media has publicized the GoA's first steps to disconnect illegal connections and indict offending consumers in the court, and has discussed the environmental impact of untreated wastewater. This has contributed to increased awareness

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regarding water issues. However, more needs to be done to communicate the Government's sector reform to consumers, water utilities and local governments. Investments Needs The drinking water and sewerage infrastructure in Albania is considerably aged, damaged, and inefficient. Leakage in supply systems and sewers is substantial and health risk for the population is significant. The demographic changes related to the uncontrolled rural-to-urban migration and the subsequent sharp increase of the demand for drinking water and sewage disposal services has exacerbated the already precarious situation of the water and sanitation infrastructure, which is operating at its peak capacity. The weakness in urban planning and its enforcement puts another strain on water service delivery. Widespread unlicensed borehole drilling is having an impact on the water resources and the lack of environmental enforcement is another factor contributing to increased pollution and degradation of the environment. Qualification of the Technical and Managerial Staff The lack of well trained financial and technical personnel in the utilities has led to inefficiency in financial management and technical operation. The technical and managerial staff will have to get more exposed to training programs based on the management experience of other European water utilities.

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CHAPTER 3 OBJECTIVES AND MAIN REFORMS

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3.1 OBJECTIVES The Government of Albania has applied a two-tiered approach to its Water Supply and Sanitation Strategy, which includes: a short-term priority reform and investment program and medium-term reform and investment program to stabilize and improve water supply and sanitation services. The long term objective of the Government's Strategy for the water supply and sanitation sector is to achieve sustainable water supply and sanitation services at the EU Standards in urban and rural areas. The strategy presented in this report includes the short-term and medium term reform and investment program which will help Albania to reach its long-term development objectives in the water sector, which is linked with the overall objectives of Albania to join the EU. 3.2 MAIN REFORMS 3.2.1 Management Reform Demand Management · · · · · · Introduce metering, first to large consumers and then move towards universal metering Start installation of water meters in high consumption areas and steadily continue with the rest of the consumers Introduce metered billing Enforce tariff collection Disconnect non-paying customers Installation of production and flow meters. Monitoring and Benchmarking · · · · Develop and implement monitoring and benchmarking in the sector. This includes the creation of a Monitoring and Benchmarking office for water resource management, water supply and sewerage in the General Directorate of Water Supply and Sewerage. Coordinate with other sectors (e.g., health, environment) the monitoring and benchmarking program Make the results of the monitoring and benchmarking public Assist the water utilities in developing their monitoring program. Qualification of personnel · · · I. Implement vocational training program for utility staff in the areas of asset management, project planning, maintenance management, tariff policy and tariff determination, costcenter based accounting, demand management and customer service Implement training programs for local governments/supervisory boards for utility supervision, tariff setting, utility benchmarking, demand management etc. Implement training programs for the Water Regulatory Commission with the objective to improve their support to the water utilities in financial planning, tariff calculation etc.

Capacity Building for the Water and Sanitation Sector · Provide technical assistance to the General Directorate for Water Supply and Sewerage as main institution in the field of water supply and sewerage

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· ·

Develop commercial & business capacity in the water utilities to become financially selfsustaining companies Support the Water Utility Association.

3.2.2 Legal and Institutional Reform Institutional reform · · · · · · Change the role of Government from service provider to policy maker, regulator, and facilitator in the sector Support institutions in charge of monitoring/enforcement to perform all their assigned tasks Strengthen and enforce Urban Planning Strengthen the enforcement against unlicensed borehole drilling Complete the transformation of the water enterprises into commercial companies Establish the Rural Water and Sanitation Agency (RWSA) at central and regional level. The RWSA will be under the MoTAT, but governed by an independent Board. Its role will be to provide technical support and investment funds to communes and communities for implementation and operation of rural water supply and sanitation schemes (see Rural Water Strategy for details). Promote the participation of the villagers to create community water association.

·

Legal reform · Review the legal framework governing the decentralization process and the assigning of competencies to the local authorities with regard to water and sanitation service provision; complete any missing bylaws providing the tools that would allow local structures to perform their tasks. Change statute of water utilities in a way that provides local governments with the majority of board members Change statute of the water utilities in a way that the utilities can enter into service agreements with municipalities and communes in their service area Transfer the ownership of the water utilities from the Central Government to the municipalities and communes. This should in most cases be done in a way that will not lead to a break up of the 54 Regional Water Utilities into small units which could not be run efficiently. In the contrary, the merging of Regional Water utilities to larger utilities should be encouraged.

· · ·

Public Awareness and Communication Program · The Government should work closely with the media, the civil society, and different target groups (i.e., women) in developing a strategy to promote: (a) water conservation; (b) regular payment of the water bill; (c) rejection of illegal connections; (d) progressive introduction of wastewater tariff; and (e) environmental concern, etc. Create a public communications office in the Ministry of Territorial Adjustment and Tourism Create a public information system as a venue for stakeholder feedback on water policy and dissemination of its impact on the customer, especially the poor Disseminate the experience of the international operators in Albania

· · ·

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·

Create consumer panels.

Private Sector Participation (PSP) Reform · · · · · Increase private sector participation in service delivery Improve the legislation to facilitate private sector investments in the water sector Lift bureaucratic obstacles that decrease the private sector's interest in water provision Ensure service procurement through fair and transparent bidding processes Promote service delivery by Albanian companies, e.g. outsourcing, management/concession contract in small towns and villages. This could be combined with OutputBased-Aid (OBA) and with targeted subsidies for serving the poor.

3.2.3 Financial Reform

· · · · · Improve accounting and financial management of utility operations, including the introduction of cost-center accounting Gradually increase the tariffs to achieve cost recovery of the operation and maintenance cost in the mid-term and full cost recovery in the long term, with well defined stages and targets Introduce wastewater tariffs in all cities and adjust the tariff gradually towards recovery of operation and maintenance cost and seek grant finance wherever possible for the initial investment Increase collection rates with defined targets and the short and mid-term. Change the Government's subsidy policy to a performance-based, transparent scheme which encourages utilities to move gradually toward cost-recovery and depart from the previous system of subsidies that created huge inter-enterprise arrears.

3.2.4 Poverty Mitigation Reform · · · · · Provide basic water and sanitation services to the poor Provide safe water to the served population Provide affordable water supply: pilot of a "minimum water for free" scheme in Durres, Fier, Lezhe and Saranda and introduce a lifeline tariff, with a reduced tariff only for the first 20 liters per capita per day Increase access to the water and sanitation services in neglected areas Conduct Poverty and Social Impact Assessment related to the sector.

3.2.5 Technical Reform Investments · · Develop and prioritize a mid-term capital investments program for urban and rural areas to meet the urgent rehabilitation needs of the dilapidated networks. Develop and priorities a long-term capital investment program for urban and rural areas to improve and expand water supply and wastewater infrastructure.

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· ·

Give priority to improvements in water supply services, which are key for mitigating health risks and economic prosperity, without neglecting the need for improved wastewater collection and treatment. Priority for investments in wastewater treatment should be given to areas where inadequate wastewater disposal is impairing Albania's tourist industry or/and where globally important biodiversity is at stake (e.g. lake Orhid). Investments for wastewater treatment should provide adequate treatment by using simple and low cost solutions, regarding both, the investment and the operation cost.

Standards · · Develop new standards for goods and works to be carried out in the water supply and waste water sector. Develop new guidelines for designs of water supply and waste water facilities.

3.4. SHORT ­ TERM ACTION PLAN To start the implementation of the proposed strategy and to achieve its objectives a short-term Action Plan (2003 ­ 2006) was developed to be implemented by the Albanian authorities and water utilities with the support of the international donor community. This action plan is based on the decentralization strategy of the Government and therefore its success relies very much on the role and efforts of the local governments. This Action Plan reflects also the experience accumulated by the Government's implementation of the Summer Action Plan in 2002, which included disconnection of illegal connections and collaboration with local governments. The short-Term Action Plan is also linked to the Government Program - NSSED in terms of the objectives, actions, and targets to be achieved in the water and sanitation sector. The overall objective of the Short-Term Action Plan is to improve the efficiency and effectiveness of the service provision, safe access to water services, and to improve services to low income families and those without access to the services. The expected outputs are: (i) changing the role of central government from service provider to a service regulator and facilitator, being in charge of policy making, allocation of resources to support clear sector development goals, setting of service standards, regulation and control of the monopolistic behaviors of the companies, facilitation of private sector participation, and monitoring; (ii) changing the role of the local governments so that they would become responsible for investments and operational decision-making of water and wastewater services; and (iii) stabilize and improve service delivery, including service delivery to the poor. In the urban sector the 15 largest water utilities have been selected to participate in the action plan (out of 54 water utilities). These water utilities serve roughly 75 percent of Albania's urban population. All of the selected water utilities experienced a large increase in population (83 to 161 percent between 1989 and 2001, see annex: table 9), which puts an additional strain on the water supply and sanitation systems. The population growth was mainly caused by rural to urban migration and is expected to continue.

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Summary of Actions and Costs Estimate In the Short-Term (2003 ­ 2006)

Actions 1 Management Reform. 1.1 Demand Management Metering of production & distribution Responsible organizat. Cost Estimate TimeFrame Source of Financing

MoTAT, Utilities

1,000 ­ 200,000 per utility 1,000 ­ 100,000 per utility

2003 ­ 2005

GoA, utilities, Italian Cooperation, KfW, WB. More donor funds needed GoA, utilities, Italian Cooperation, KfW, WB. More donor funds needed for budget institutions, private customers are selffinancing

Metering of the large customers

MoTAT & Utilities

20032004

Metering of domestic customers

MoTAT, Utilities

15,000 ­ 2,000,000 per utility

20032007

GoA, utilities, Italian Cooperation, KfW, WB. More donor funds needed

GoA, utilities, KfW, WB. More donor funds needed TA funds not identified N/A

Establishment of a computer based billing and collection system Establish an incentive based supervision scheme for meter reading and collection The MoTAT and the MoLGD will sign an agreement with the Ministry of Public Order about the support to be given by the local police in each of the participating cities. Complete the transformation of the water enterprises into commercial companies Complete the merging of water and sewerage activities in one company Establish the Rural Water and Sanitation Agency (RWSA) at central and regional level (details see Rural Water Strategy) Promote the participation of the villagers to create community water association Approval of the rural water and sanitation strategies from the CM

MoTAT, Utilities MoTAT, Utilities MoTAT, MoLGD, MoPO

50,000 ­ 700,000 per utility 50,000 N/A

20032006 20042005 Each year

Municipaliti es, MoTAT, MoEc Utility, Municipaliti es, MoEc, MoTAT MoTAT

N/A N/A

By end of 2003 By end of 2003 2004 2007 2004 ­ 2007 2003

N/A N/A

Additional Funds: 750,000 N/A N/A

GoA, WB TA Additional donor funds needed N/A N/A

RWSA MoTAT, MoLGD

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Actions 2.2 Legal reform Transfer the assets ownership to the municipalities and communes without breaking up the regional companies into small units Harmonize law No. 8102 with Law No. 8652 to clarify that the local governments have the authority to set tariffs Approve the improved water company statutes Enter into service agreement between the local governments and water utilities Change law No.7926 "On the Transformation of the StateOwned Enterprises into Commercial Companies" to allow further changes to the statutes so that local governments nominate majority of board members 2.3 Public Awareness and Communication campaign The Government should work with other stakeholders to promote: water conservation, regular payment of the water bill, rejection of illegal connections, introduction of wastewater tariff, environmental concern, etc. Create a public communications office in the MoTAT. Create a public information system as a venue to promote govt. strategy and policy, and for stakeholder feedback. Disseminate the experience of the international operators in Albania.

Responsible organizat. MoLGD, MoTAT, municipaliti es/commune s Water Regulatory Entity, MoLGD MoEc MoLGD, municipaliti es, water companies MoJ, MoTAT, MoEc

Cost Estimate N/A

TimeFrame 20032004

Source of Financing N/A

N/A

2003

N/A

N/A N/A

1st half of 2003 20032004 By mid of 2004

N/A N/A

N/A

N/A

MoTAT, local governments

TBD

20032005

MoTAT, LG

MoTAT MoTAT, WB TA MoTAT, Water Utility Association, water comp. Local governments

Additional Funds : 100,000 Additional Funds : 200,000 N/A

20032004 20042005 20042007

MoTAT, WB TA, Additional donor funds needed MoTAT, WB TA, Additional donor funds needed MoTAT

Create consumer panels 2.4 Private Sector Participation reform Implement private sector participation through ongoing and future contracts

TBD

20032007

WB for four cities. Additional donor funds for other cities needed. GoA, KfW, WB

MoTAT, MoEc, MoLG municipality

As defined in the agreed projects with KfW & WB.

As defined in each project

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Actions Conduct workshop to encourage Albanian private sector participation (PSP) in water and sanitation services Develop guidelines/standard contracts for Albanian PSP Support projects with Albanian PSP 3 Financial Reform Design and implement collection ratio improvement program with quarterly defined targets Develop a financial projection for each utility Set water and sewerage tariffs gradually towards O&M cost recovery level Introduce sewerage service tariffs in all 54 water utilities (or municipalities where services have not been merged) Change the Government's subsidy policy to a performance-based, transparent scheme which encourages utilities to move gradually toward cost-recovery and depart from the previous system of subsidies that created huge inter-enterprise arrears. Integrated this scheme into the MTEF. Introduce cost center accounting in the utilities 4 Poverty Mitigation Reform Pilot lifeline tariff policy with free minimum water supply and shutoff policy for those consuming in excess and not paying. Provide public taps for disconnected customers. Conduct Poverty and Social Impact Assessment related to the sector Include provisions for serving the poor in all new PSP contracts

Responsible organizat. MoE, MoTAT MoTAT, Trade Organization MoTAT, MoEc Water utilities, MoTAT Utilities assisted by RWE & MoTAT Water utilities, municipaliti es Water utilities, municipaliti es MoF, MoTAT

Cost Estimate 25,000

TimeFrame 2004

Source of Financing GoA , WB

TBD

By 2005

GoA , WB

N/A TA: 85,000 TA: 165,000 N/A

2004 2007 20042005 20042005 2003 ­ 2007 2003 ­ 2004 2003 ­ 2005

GoA, Donors Donor funds needed. Donor funds needed.

N/A

N/A

N/A

TA: 250,000

Donor funds needed.

MoTAT, WRE & util. MoTAT, municipality

TA: 425,000 N/A

2004 ­ 2005 2003

Donor funds for TA and equipment needed GoA & WB

WB for eight cities MoTAT

TBD N/A N/A

2003 2004 20032007 20032007

Funds for other cities and rural areas needed N/A N/A

Link subsidies from GoA, MoF, among others, to service MoTAT quality to the poor and

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Actions

Responsible organizat.

Cost Estimate

TimeFrame

Source of Financing

introduc. of lifeline tariff 5 Technical Reform 5.1 Investments Develop and priorities a midterm capital investments program for urban and rural areas Re-introduce the preparation of an overall Public Investment Program (PIP) as important input for the MTEF Complete the ongoing projects with donors funding in urban and rural areas, such as Tirana, Durres, Fier, Elbasan, Shkoder, Korca, Vlora, Lezhe, Saranda, Gjirokastra, Kavaja, Pogradec, etc. Co-ordinate all foreign investments (donors, NGO, different organization) in the sector Discuss with donors to start new water projects in rural and urban areas 5.2 Standards Establish new technical norms and designs standards.

MoTAT Minicipalitie s Water Companies MoF with support from MoTAT MoTAT, Implementin g Agency, and Municipaliti es MoTAT

TBD from the Investment Program N/A

2004

Government and potential donors

By 2004

Budget

N/A

As defined in the agreement with donors Ongoing

Donors and Government

N/A

Budget

MoTAT

N/A

20032004

N/A

GDWSS

N/A

2003 2005

N/A

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Short-Term targets: To measure the implementation progress of the Short-Term Action Plan the following set of indicators with annual targets will be monitored by the Monitoring and Benchmarking office in the GDWWS (see below table A1 & A2). Table A1 : Table Water Supply and Sanitation Sector Short-Term Targets Urban Water

OBJECTIVES URBAN WATER I. Achieve MDG targets in Albania: Sustainable Access to Safe Water & access to improved sanitation OUTCOME INDICATORS1 Year NSSED 2006 2002 Baseline 2003 2004 2005 2006

(a) Water quality [Percentage of served population receiving safe water] 2 (b) Minimum quantity [Percentage of served population receiving at min.2 hours of water supply per day] (c) Basic access [Percentage of population connected to water network] (d) Sustainable water supply - Percentage of population served by systems which cover O&M costs -Percentage of population served by systems which cover full costs (including debt services & investment needs) (e) Improved sanitation Percentage of population connected to sewerage network

93

80

82

85

90

93

65

52

55

57

60

65

94

88

90

91

92

93

10

6

6

7

8

10

N/A

N/A

N/A

N/A

N/A

N/A

75

68

69

70

72

75

II. Water Quality III. Improvement of Service Quality

(a) Percentage of samples complying with standards of residual chlorine (a) Average of hours of supply per day (b) Percentage of population connected to wastewater treatment facility

80 9 N/A

50 5 N/A

55 6 N/A

60 7 N/A

70 8 N/A

80 9 N/A

Note: 1 This is estimated, and will be revised after the baseline survey by December 2003.

2

The definition of safe water is: complying with Albanian standards for coliforms.

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Table A2 : Table Water Supply and Sanitation Sector Short-Term Targets Rural Water

OBJECTIVES RURAL WATER I. Achieve MDG targets in Albania: Sustainable Access to Safe Water & access to improved sanitation OUTCOME INDICATORS1 Year NSSED 2006 2002 Baseline 2003 2004 2005 2006

(a) Water quality [Percentage of served population receiving safe water] 2 (b) Minimum quantity [Percentage of served population receiving at min.2 hours of water supply per day] (c) Basic access [Percentage of population connected to water network] (d) Sustainable water supply - Percentage of population served by systems which cover O&M costs -Percentage of population served by systems which cover full costs (including debt services & investment needs) (e) Improved sanitation Percentage of population connected to sewerage network or septic systems

80

TBD

38

35.0

35.5

36.0

36.5

37.0

64 3

62 0

62.0 0

63.0 0

63.5 2

64.0 3

N/A

N/A

N/A

N/A

N/A

N/A

47

37

38

40

45

47

II. Water Quality III. Improvement of Service Quality

Percentage of samples complying with standards for residual chlorine Average of hours of supply per day

N/A 5

N/A 3

N/A 3.5

N/A 4.0

N/A 4.5

N/A 5.0

Note: 1 This is estimated, and will be revised after the baseline survey by December 2003. 2 The definition of safe water is: complying with Albanian standards for coliforms.

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3.4. MEDIUM ­ TERM ACTION PLAN FOR STRATEGY IMPLEMENTATION The Government's medium term (2007 ­ 2012) objectives in the Water and Sanitation Sector is to provide access to reliable and safe drinking water to all parts of the Albanian society, including the poor. To achieve this objective the Governments is pursuing the following goals: (i) complete rehabilitation of the obsolete water supply and sewerage networks; (ii) extension of the services to the poor and under-served, (iii) transformation of the water utilities to self financing entities; (iv) increase of PSP in the water sector; (v) enabling of local governments to provide safe and sustainable water and sanitation services; and (vi) introduce adequate collection and treatment of wastewater. To achieve these goals the GoA will continue to provide funds for the water and sanitation sector, but will do so in a transparent and efficient manner. Albania has included the Millennium Development Goals in its Water Supply and Sanitation Strategy. The Millennium Development Goals for the water sector are to improve the access to safe and reliable drinking water supply and improved sanitation. Achieving these goals is considered to be key for reducing poverty in the country. The Millennium Development Goals stand for (a) halving the proportion of people without sustainable access to safe drinking water [Target 10]; and (b) access to improved sanitation [target 11]. Although reliable data for Albania has still to be collected, the data already available indicates that only very few urban water utilities are providing safe and sustainable access to drinking water. The Government of Albania is leading the reform process and it is its responsibility to define the way to reform the sector in detail, the timeframe, the budget, and make necessary changes once these activities are under implementation. This will allow for realistic planning and proper monitoring. Given the difficulty to assess revenue collection and budget setting without certainty about the extent of successful sector reform implementation, these activities should be integrated in a benchmarking exercise to be designed and discussed with all stakeholders, including the Ministry of Finance. The international donor community recognizes the need to help the Government in this process.

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Summary of Actions and Costs Estimate In the Medium ­Term (2007 ­ 2012)

Actions 1 Management Reform. 1.1 Demand Management Make universal metering mandatory Eliminate customer cross subsidies Increase tariffs to cover fully the water supply cost of the company, including depreciation and debt service 1.2 Monitoring and Benchmarking Continue the sector monitoring and benchmarking and disclose the information to the public 1.3 Qualification of personnel Create self financed vocational training center which issues certificates/diploma for staff passes exam after training. Training for local authorities will also be provided by the center. 1.4 Capacity Building for the Water and Sanitation Sector Make the establishment of a business plan mandatory for each water utility 2 Legal and Institutional Reform 2.1 Institutional reform Channel all Government's and the majority of donor's fund for rural areas through the Rural Water and Sanitation Agency 2.2 Legal reform Have clear regulation in place that would facilitate advanced forms of private sector participation like lease and concession contracts 2.3 Public Awareness and Communication campaign Continue to support public awareness and community education programs in environmental protection and water resources management Responsible organization WRE, MoTAT WRE, MoTAT, Utilities Local Governments Cost Estimate N/A N/A N/A TimeFrame By 2008 By 2010 See table B1 Source of Financing Utility revenues N/A N/A

GDSSW

32,000/a

2007 2012 By 2007

MoTAT's budget

MoTAT in cooperation with WRE, MoE, MoLG

175,000 seed funding

MoTAT & Donor funding

WRE, MoTAT

N/A

By 2007

N/A

MoTAT

N/A

By 2010

N/A

MoJ, MoTAT

N/A

By 2010

N/A

MoTAT, MoE

50,000

2007 2012

Budget

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Actions 2.4 Private Sector Participation reform Support more advanced forms of domestic and international private sector participation like lease and concession contracts 3 Financial Reform Provide subsides only to utilities which meet targets regarding service delivery, financial performance and environmental protection 4 Poverty Mitigation Reform Based on previous experience and developments the Government will review if a lifeline tariff or transparent subsidy scheme is the best way to support the poor Continue to conduct Poverty and Social Impact Assessment related to the sector Include provisions for serving the poor in all new PSP contracts Link subsidies from GoA, among others, to service quality to the poor 5 Technical Reform 5.1 Investments Update the mid-term capital investments program for urban and rural areas Co-ordinate all foreign investments (donors, NGO, different organization) in the sector Continue discussion with donors to start new water projects in rural and urban areas 5.2 Standards Update technical norms and designs standards in accordance with affordability and long term strategy (EU accession).

Responsible organization MoTAT, MoEc

Cost Estimate TBD

TimeFrame 2007 2012

Source of Financing Budget

MoF, MoTAT

N/A

2007 2012

Budget

GoA

N/A

2007 2012

N/A

MoTAT MoTAT MoF, MoTAT

TBD N/A N/A

2007 2012 2007 2012 2007 2012 Every year 20072012 20072012 20072012

TBD N/A N/A

MoTAT Minicipalities Water Companies MoTAT MoTAT

TBD from the Investment Program N/A N/A

Government and potential donors Government Respective donor/Government GoA and potential donors N/A

GDWSS

N/A

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Medium-Term Targets: The Medium-Term Targets are presented in table B1 & B2 as an estimate of what is expected to be achieved and with less indicators than used for the Short-Term Targets. Table B1 : Water Supply and Sanitation Sector Medium-Term targets Urban Water

Year OBJECTIVE OUTCOME INDICATORS

1

MDG 2015

2007

2008

2009

2010

2011

2012

URBAN WATER I. Achieve MDG targets in Albania: Sustainable Access to Safe Water & access to improved sanitation

II. Water Quality III. Improvement of Service Quality

(a) Water quality [Percentage of served population receiving safe water] 2 (b) Minimum quantity [Percentage of served population receiving at min.2 hours of water supply per day] (c) Basic access [Percentage of population connected to water network (d) Sustainable water supply - Percentage of population served by systems which cover O&M costs - Percentage of population served by systems which cover full costs (including debt services & investment needs) (e) Percentage of population connected to sewerage network Percentage of samples complying with standards for residual chlorine (a) Average of hours of supply per day (b) Percentage of population connected to wastewater treatment facility

98

93

94

94

95

96

97

98

67

70

75

80

85

90

99

95.0

95.5

96.0

96.5

97.0

97.5

100

40

50

60

70

80

90

100 85 100 18 30

20 75 83 9 N/A

35 76 86 10 N/A

45 77 90 11 11

60 78 92 12 15

70 79 95 13 20

85 80 98 14 25

Note: 1 This is estimated, and will be revised after the baseline survey by December 2003. 2 The definition of safe water is: complying with Albanian standards for coliforms.

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Table B2 : Water Supply and Sanitation Sector Medium-Term Targets Rural Water

OBJECTIVE RURAL WATER I. Achieve MDG targets in Albania: Sustainable Access to Safe Water & access to improved sanitation OUTCOME INDICATORS1 Year MDG 2015 2007 2008 2009 2010 2011 2012

II. Water Quality III. Improvement of Service Quality

(a) Water quality [Percentage of served population receiving safe water] 2 (b) Minimum quantity [Percentage of served population receiving at min.2 hours of water supply per day] (c) Basic access [Percentage of population connected to water network (d) Sustainable water supply - Percentage of population served by systems which cover O&M costs - Percentage of population served by systems which cover full costs (including debt services & investment needs) (e) Percentage of population connected to sewerage network Percentage of samples complying with standards for residual chlorine Average of hours of supply per day

TBD

TBD

TBD

TBD

TBD TBD

TBD

Note: 1 This is estimated, and will be revised after the baseline survey by December 2003. 2 The definition of safe water is: complying with Albanian standards for coliforms.

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3.5. REFORM RISKS The implementation of the Government's short and medium term action plans is ambitious in its targets and bears some risks. One of the major risks is that the human and financial resources for reform implementation are insufficient to achieve the anticipated pace of reform implementation. To mitigate this risk the Government is soliciting technical and financial assistance from the donor community. This will include training for representatives of local governments who are taking over more responsibilities as the decentralization process progresses. In addition, the ongoing civil servants reform is anticipated to strengthen the Government institutions, which are carrying out major parts of the reform program. Another major risk is the reaction of the public when demand management will be introduced. Although most customers are expected to welcome the service improvements that go hand in hand with the introduction of demand management, some customers will show a hostile reaction towards tariff increases, metering of consumption, billing based on metering, disconnection of non paying and illegal customer etc. To mitigate negative reactions, the MoTAT in cooperation with the local governments and water utilities, will conduct a public communication campaign, which will explain the need for reform and focus on the positive impact the reform will have. The MoTAT with the assistance of the World Bank is currently working on a program to establish a public communication office in the Ministry, which would take the lead in conducting the public communication campaign. In addition to the public communication program, negative reaction to the reform will be reduced by social measures that are aimed at improving service delivery to the poor and mitigate possible negative impact on the poor. Such measures include, but are not limited to: introduction of lifeline tariffs, priority of meter installation in poor households so that they can avoid paying increased flat rates, provision in PSP contracts to provide minimum services to all customers etc. In addition to the sector's internal risks, other risks exist which are outside the sector scope such as the political and economic development of Albania, which will have repercussions on the sector. The Government acknowledges the political risk of such a comprehensive sector reform, however, it has decided to proceed with setting a road map with clear objectives and indicators to improve water services and operational and financial sustainability. To mitigate the outside risk, the Government's reform aimed at creating a strong, largely self-reliant sector in which local governments play a key role.

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4. ANNEXES

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TABLE 1: FINANCIAL DATA 2002 No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 Water utility Rrogozhine Fushe Kruje Gjirok (fsh)8 Shkoder (fsh) Fushe Arrez Delvine Kucove Tepelene Kraste Kruje Gramsh Sarande Kukes Libohove Kavaje Korce (q) Permet Erseke Lushnje(q) Peshkopi Tirane (q) Puke Patos Rubik Gjirok (q) Mirdite B Curri Vau i Dejes Has Vlore Elbasan (fsh) Pogradec Bilisht Polican Shkoder(q) Librazhd Mallakaster Burrel Berat Tirane (fsh) Peqin Skrapar Malesi e Madhe Fier Leskovik TOTAL Revenue x 1000 leke 8500 16873 2841 8569 2075 6382 29095 19600 1753 19500 27682 15971 34266 1100 72200 106684 20470 7065 56468 20567 745626 5489 21697 3380 19580 10200 18522 1081 5008 334804 53639 41096 8507 20344 84138 29900 10677 9989 64000 50352 8080 16480 4459 73867 1701 2120277 Expenditure x 1000 leke 13000 22765 9500 22000 6815 13362 63724 22600 7700 22750 27474 43446 35815 2900 72200 96525 20170 9334 54160 21084 685482 14466 68515 8100 32310 18139 24284 3990 18544 129804 106973 64487 12000 23023 97874 31385 28089 9989 63000 70673 21900 22973 26224 133549 3044 2306141 Profit/Loss -4500 -5892 -6659 -13431 -4740 -6980 -34629 -3000 -5947 -3250 208 -27475 -1549 -1800 0 10159 300 -2269 2308 -517 60144 -8977 -46818 -4720 -12730 -7939 -5762 -2909 -13536 205000 -53334 -23391 -3493 -2679 -13736 -1485 -17412 0 1000 -20321 -13820 -6493 -21765 -59682 -1343 -185864 (x 1000 leke) Operating ratio 1.53 1.35 3.34 2.56 3.28 2.09 2.19 1.15 4.39 1.16 0.99 2.72 1.04 2.63 1 0.9 0.98 1.31 0.95 1.02 0.91 2.63 3.15 2.39 1.65 1.77 1.31 3.69 3.7 0.38 1.99 1.56 1.41 1.13 1.16 1.04 2.63 1 0.98 1.4 2.71 1.39 5.88 1.8 1.78 1.08

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Table 2: Water Sector debts in year 2002

Water Utilities Debts to Social Insurance Debts to KESH Debts to MoF for VAT Total Lek 519,978,492 2,093,227,872 140,049,864 2,753,256,228 USD 3,823,371 15,391,381 1,029,778 20,244,530 % 19 76 5 100

Table 3: Water Sector Subsidy (million Lek)

Years

Subsidy

1993 70

1994 147

1995 142

1996 30

1997 45

1998 134

1999 225

2000 70

2001 60

2002 762

Planned 2003 765

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TABLE 4: Billing and Collection for 2002

Nr 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 45 46 47 48 49 Utility Rrogozhine Fushe Kruje Gjirokaster (fsh)8 Shkoder (fsh) Fushe Arrez Delvine Kucove Divjake Tepelene Kraste Kruje Gramsh Sarande Kukes Libohove Kavaje Korce (q) Lac Permet Erseke Lushnje(q) Peshkopi Tirane (q) Puke Patos Rubik Gjirok (q) Mirdite B Curri Vau i Dejes Has Vlore Lezhe Elbasan (fsh) Pogradec Bilisht Polican Shkoder(q) Librazhd Mallakaster Burrel Berat Tirane (fsh) Peqin Skrapar Malesi e Madhe Fier Leskovik TOTAL Billing m3 354772 231324 144000 549480 150580 106443 793343 178677 232874 51934 658000 727766 691941 1034273 104000 1510925 2320068 1016702 558432 260013 1549617 625000 17237997 161285 1427844 146599 949646 348071 474146 218363 149451 7232413 1120000 1335122 1449750 286540 389896 5259218 550000 822068 619000 4252000 1881330 346116 423107 407698 2604965 92645 64035434 Collection m3 331847 78693 94700 273478 105377 106443 734030 130452 77880 43798 412000 695885 371583 463912 68000 886517 2228140 392802 525426 232659 2065412 537000 14307537 126287 720787 166000 713414 139728 169225 90108 96084 2012381 627000 1195043 906833 256949 274902 2086055 536000 356032 419530 2087300 1303208 227644 264684 259315 1377046 92645 41667771 Collection Ratio 93% 34% 66% 50% 70% 100% 93% 73% 33% 84% 63% 95% 54% 45% 65% 58% 96% 38% 94% 89% 133% 85% 83% 78% 50% 113% 75% 40% 36% 41% 64% 28% 56% 89% 62% 89% 70% 39% 97% 43% 68% 49% 69% 66% 62% 63% 53% 100% 65%

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Table 5: Water and sanitation sector investments (x 000 Lek)

Year Status GOA Financing Water Sewerage 420,000 6,000 403,973 102,000 590,225 193,970 1,169,108 350,500 1,070,162 424,768 286,968 48,275 694,400 120,000 ???? ???? 474,300 192,020 765,347 345,356 704,045 297,368 801,836 264,708 ???? ???? Total W&S 426,000 505,973 784,195 1,519,608 1,494,930 335,243 814,400 ???? 666,320 1,110,703 1,001,413 1,066,544 ???? % of GDP Donors W&S GOA Counterpart W&S Total W&S

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year

actual actual actual actual actual actual actual actual actual realized realized planned projected Status

227,174 149,958 209,651 380,566 201,042 2,745,000 3,500,000 3,808,178 6,441,000

99,996 227,166 239,999 197,037 69,302 2,099,993 1,444,000 840,000

1,746,782 1,744,884 772,060 1,434,965 398,079 3,480,622 6,710,696 6,253,591 8,347,544

GOA

W&S 426,000 505,973 784,195 1,519,608 1,494,930 335,243 814,400 ???? 666,320 1,110,703 1,001,413 1,066,544 ????

GDP

Total GOA & Donors

% of GDP

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

actual actual actual actual actual actual actual actual actual realized realized planned projected

50,697,000 125,334,000 184,393,000 229,793,000 280,988,000 341,716,000 460,631,000 506,205,000 545,847,000 594,346,000 657,030,000 726,219,000 802,569,000

0.84% 0.40% 0.43% 0.66% 0.53% 0.10% 0.18% ??? 0.12% 0.19% 0.15% 0.17%

1,746,782 1,744,884 772,060 1,434,965 398,079 3,890,265 6,710,696 6,253,591 8,347,544

0.76% 0.62% 0.23% 0.31% 0.08% 0.71% 1.13% 0.95% 1.15%

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Table 6: Water and Sewerage Tariffs (Lek/m3)

II. No City Water 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Rubik Reshen Tepelene Puke Berat Policani Erseka Permet Hasi Librazhd Elbasani city Korce Kavaja Kukes Rogozhine Ura vajgurore Lushnje qytet Kucove Gramsh Peshkopi Bilisht Pogradec Kruje Tirane Durres Fier Lezhe Saranda 21 25 20 20 20 27 20 24 25 22 41.3 32 31 20 25 25 18 25 22.5 18 20 24 19 18 31 30 28 30

Dom estic tariff Sewage 4 4 3.5 3 5 5 4.5 3 4.5 3.5 2 3.5 4.5 3 3 3 3

Budget institut. tariff

Private busin. tariff Water 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 Sewage 10 10 8 8 10 10 10 10 11 8.5 8 10 10 6 6 6 6

Water

60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60

Sewage 8 8 6 4 8 8 8 6 7 7 3 6 6 4 4 4 4

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Table 7: Water produced, billed, and collected (January ­ March 2003) Nr 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 Utility Nd uj M. Madhe Nd uj Novosele Nd uj Librazhd Nd uj Gjirok (q) Nd uj Tepelene Nd uj Durres Nd uj Gjirok (fsh) Nd uj Lush nje (q) Nd uj Shkoder (fsh) Nd uj-k Lezhe Nd uj Patos Nd uj Kraste Nd uj Bulqize Nd uj-k Rubik Nd uj Kruje Nd uj Mat Nd uj Delvine Nd uj Ballsh Nd uj Berat Nd uj Polican ND uj Bilisht Nd uj Erseke Nd uj Krume Nd uj Peqin Nd uj Tirane (fsh) Nd uj Kavaje Nd uj B. Curri Nd uj Rrogozhine Nd uj Kucovve Nd uj Puke Nd uj Divjake Nd uj Ura Vajgurore Nd uj Korce (q) Nd uj Peshkopi Nd uj-k fushe Arrez Nd uj Vau i Dejes Nd uj Mirdite Nd uj Elbasan (fsh) Nd uj Kukes Nd uj Shkoder(q) Nd uj Lushnje(fsh) Nd uj Gramsh Nd uj Permet Nd uj Tirane (q) Nd uj Vlore TOTAL Produced m3 178848 324000 304000 365000 316548 7030000 130000 940000 230000 654000 490743 56664 272160 41500 128800 233280 209700 330000 1668600 180000 156984 91720 135000 276300 700000 548808 327129 120000 441638 171000 78000 223560 1400000 438000 39155 68000 109706 1168920 438000 3110000 642430 254300 192258 20985000 4000000 50199751

Billed

m3 115459 25762 127912 298300 178445 2079000 18490 376537 137070 293000 366396 12982 101438 35984 128700 150376 85835 225930 1051300 88269 76922 68791 51493 83465 484042 368862 113553 96817 107336 38493 57000 67552 566922 145703 35595 68000 91422 381492 255040 1309586 449736 168745 133259 4403401 2055651 17576063

Collected m3 77478 20120 124771 206431 74252 1190000 13826 278390 88287 131000 275192 14418 37532 30211 67300 109720 82493 189132 797200 60322 46275 44871 24336 55071 304980 253677 19838 89317 87030 35484 44221 60360 556166 109140 29760 28128 20141 285655 106524 616434 358156 161876 111904 3402146 671446 11391011

Collection/ production 65% 8% 42% 82% 56% 30% 14% 40% 60% 45% 75% 23% 37% 87% 99% 64% 40% 68% 63% 49% 49% 75% 38% 30% 69% 67% 35% 80% 24% 23% 73% 30% 40% 33% 90% 100% 83% 33% 58% 42% 70% 66% 69% 21% 51% 35%

Billed/ collected 67% 78% 98% 69% 42% 57% 74% 74% 64% 44% 75% 111% 37% 83% 52% 73% 96% 84% 76% 68% 60% 65% 47% 66% 63% 68% 17% 92% 81% 92% 77% 89% 98% 75% 83% 41% 22% 75% 42% 47% 79% 96% 84% 77% 33% 65%

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TABLE 8: Arrears to Water Utilities for 2001 (leke) No. City Receivables of more Receivables than 1 year 1 year 1 Mat 19,276,681 2 Berat 101,089,083 19,883,599 3 Delvine 16,111,200 1,240,978 4 U-Vajg 4,673,135 34,888,654 5 Kruje 11,552,812 6 Vlore 303,563,479 112,386,581 7 Puke 10,501,974 8 Kucove 116,896,210 9 Librazhd 2,846,073 10 Korce(q) 18,032,224 11 Korce (fsh) 42,908,716 12 Gramsh 20,983,028 13 Pogradec 87,099,139 24,125,654 14 Tirane(q) 3,728,587,948 473,683,952 15 Tepelene 54,182,714 24,737,520 16 Kukes 20,116,881 17 Erseke 381,641 18 Shkoder(fsh) 53,861,655 19 Rubik 216,966 20 Polican 53,997,308 21 Rreshen 20,300,993 22 Lushnje(q) 102,863,960 31,693,149 23 Elbasan(q) 265,504,591 107,266,960 24 Elbasan (fsh) 172,550,752 56,232,547 25 Mallakaster 95,908,727 26 Vau i Dejes 6,330,659 27 Peshkopi 52,107 4,548,398 4,836,278,108 1,384,800,540 Total

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Table 9: Population growth in 15 cities

District Name 1. Tirane 2. Durres 3. Elbasan 4. Shkoder 5. Vlore 6. Fier 7. Korçe 8. Lushnje 9. Kavaje 10. Gjirokaster 11. Sarande 12. Pogradec 13. Kuçove 14. Kruje 15. Lezhe Total 15 cities City Population 198911 238,100 82,700 80,700 79,900 71,700 43,100 63,600 29,800 25,200 24,200 15,700 19,300 21,700 13,000 10,300 819,00 200112 352,581 113,465 95,554 85,798 85,180 76,166 58,911 38,336 28,149 22,866 14,553 23,762 18,038 19,372 16,592 1,049,323 Growth 148% 137% 118% 107% 119% 177% 93% 129% 112% 94% 93% 123% 83% 149% 161% 128%

11

Statistical Yearbook of Albania 1991, Population census of 1989, Ministry of Economy, Directorate of Statistics, pg.38,39 12 Statistical Yearbook of Albania 2003, Population census of 2001, INSTAT 2003, pg.32

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5. REFERENCES 1. Academy of Sciences of Albania, Administration of Geo-resources: Economic Development and Environmental Impact; Proceedings of the Italian-Albanian Seminar, October 2000 2. Academy of Sciences of Albania; Draft Proposal on the National Program 'Natural Resources 1999-2001'. 3. Ahmetaj, A. et al. Institute for Contemporary Studies (ICS); Legal Assessment on Corruption ­ Albania; for "Civil Society Reduction of Corruption in Albania" Project, Management Systems International (MSI); Tirana, February 2001 4. Albanian Human Development Report 2000 5. Bushati, G. Decentralization Strategies and Ownership Transformations in the Albanian Water Sector; M.Sc. Thesis SEE 001, International Institute for Infrastructural, Hydraulic and Environmental Engineering, Delft, The Netherlands, 1997 6. Center for Economic and Social Studies (CESS); Albania Water Supply Urgent Rehabilitation Project ­ Social Assessment, August 2000 7. European Commission; Employment and Labour Market in Central European Countries; published by Eurostat, February 2001 8. European Union, Phare Program; Strategic Approach to the Development of the Water Sector in Albania 9. GEMS/WATER, Objective and Aims of Water Quality Assessment Operations; lecture notes, University of Surrey, Department of Civil Engineering, UK, 2001. 10. Giantris, P. et al., Report on Consensus for Cost Accounting and Tariff Setting Framework of the Albanian Water Sector. 11. Giantris, P. et al., Report on Institutional and Legal Framework of the Albanian Water Sector 12. Helmer, R., Monitoring Transboundary River Pollution; Department of Civil Engineering, University of Surrey, UK, 2001 13. Idelovich, E., Ringskog, B.; Private sector participation in water supply and sanitation in Latin America; World Bank, Washington DC, 1995 14. INSTAT; Preliminary Results of the Population and Housing Census ­ REPOBA, 2001 15. Institute for Contemporary Studies; Legal Assessment on Corruption ­ Albania; Prepared for Management Systems International; February 2001

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16. Inter-Ministerial Committee for Decentralization; Group of Experts for Decentralization; Decentralization of Water Supply Service and Sewerage ­ Based on the Analytical Report of Four GED Extended Meetings and 12 Consultations, May 2002 17. Logan, P., Ecological Quality Assessment of Rivers and Integrated Catchment Management in England and Wales; lecture handout, University of Surrey, UK, 2001 18. Ministria e Mjedisit; Plani Kombetar i Veprimit per Mjedisin 2001, Tirane, Nentor 2001 19. Ministria e Ndertimit; Kushtet Teknike te Projektimit, Vol. 4, 1978 20. Ministry of Economic Cooperation and Trade; Public Investment Program 2000-2003, February 2000 21. Ministry of Public Works; Strategic Framework for the Development and Management of Water Supply and Sanitation Sector in Albania, 2001 22. Ministry of Public Works; Water Infrastructure - Present Status and Perspective; Draft Version, 1999 23. Ministry of Territorial Adjustment and Tourism; Action Plan for the Improvement of Commercial and Financial Performance of Water Utilities; Draft Version, May 2002 24. Mirghani, M., Incorporation of People's Participation in Planning and Implementation of Water Resources Projects; M.Sc. thesis HH 149, IHE, Delft, The Netherlands 25. National Environmental Agency; State of the Environment Report, 2000. 26. Phare; National Water Strategy for Albania; Final Report, February 1997. 27. Plan International Albania: An Evaluation of Plan Albania's Water Projects; Final Report, April 2001 28. Projekti i klorifikimit te ujit; Kryqi i Kuq Shqiptar; Financuar nga Programi ECHO, 1998 29. Republic of Albania, Council of Ministers; Strategy on Growth and Poverty Reduction, Second Draft, July 2001 30. Republika e Shqiperise, Enti Rregullator i Sektorit te Furnizimit me Uje dhe Largimit e Perpunimit te Ujerave te Ndotura; Rregullore mbi Rregullat dhe Standardet e Punes per Personat Juridik qe Ushtrojne Aktivitetin e tyre ne Sektorin e Furnizimit me Uje ­ Tirane, 21 Mars 2001 31. Republika e Shqiperise, Keshilli i Ministrave; Vendim per Inventarizimin e Pronave te Paluajtshme Shteterore dhe Transferimin e Pronave ne Njesite e Qeverisjes Vendore; Nr. 500, date 14. 8. 2001 32. Savenije, H.H.G, Water Resources Management ­ Concepts and Tools; International Institute for Infrastructural, Hydraulic and Environmental Engineering, Delft, The Netherlands, 1995

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33. Solidarités; Programme d'adduction d'eau ­ Concept d'operation presente a ECHO, Octobre 2001 34. Tahal Consulting Engineers, Ltd., Privatization Models for Water Supply Systems in Communities; Lecture notes ­ International Institute for Infrastructural, Hydraulic and Environmental Engineering, Delft, The Netherlands, 1995 35. Urban Institute/USAID; Transfer of responsibility for basic public services, Presentation paper 36. World Bank and CESS; A Qualitative Assessment of Poverty in Ten Areas of Albania, June 2001 37. World Bank; Azerbaijan ­ Water Supply and Sanitation Sector Review and Strategy, March 2000 38. World Bank; Comments on Albania ­ Medium Term Expenditure Framework (MTEF), Fiscal Year 2001 ­ 2003, Water and Sewerage Sector, 26 September 2000 39. World Bank; Rural Water Supply and Sanitation Strategy for Albania, May 2001 40. World Bank; Update of the National Environmental Action Plan ­ Immediate Measures Albania; SGI, D'Appolonia, Final report, March 2001 41. World Bank; Water Resources Management; A World Bank Policy Paper; Washington D.C., 1993

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