PERFORMANCE AUDIT OF THE CONCESSION OF WATER SUPPLY AND DRAINAGE PUBLIC SERVICES

1. Audit Field The audit mission took place at the level of those administrative and territorial units where the water supply and drainage public services were licensed. It was extended, where convenient, for local regulating authorities and licensee (concessionaire) operators. Thus, 58 water supply and drainage public services were audited, out of which 44 where licensed (76 %) and, in addition, a 110 entities sample, including 58 local public administrations authorities and 52 services operators (commercial societies and self-managed public entities), were audited too. 2. Audit Objective As a general objective, the audit tried to establish to what extent the local public authorities decision to delegate the administration of these services, by leasing them, was an economic and efficient option and the administration itself made by concessionaire operators was effective. 3. Audit Leading Findings and Conclusions, generalized at the audited entities level local public administration authorities and licensed public services operators: Delegation of water supply and drainage public services administration, by licensing them, was generally made by direct assignment to some commercial societies of a local level importance, established either by reorganizing the self-managed public entities for communal services (73 % of total amount of licensee) or by the local public administration authorities (20 %). In such cases those economic agents took advantage of the license contracts in a manner considered to be too facile. The only reason took into account for selecting those agents was the fact that they were traditional operators for those areas, even they couldnt demonstrate to have a better managing solution, superior as quality to the existing one. They took over and kept performing the same elder organizational deficiencies, concerning the management and the mentalities of the former self-managed public entities. The purpose of local public administration authorities has no connection with establishing the highest possible level of water supply and drainage
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public services. Those ones accepted, took over and maintained, in an inertial way, a large part of the malfunctions inherited from the former self-managed public entities. Thus, the development and future operating of those services were influenced in a negative manner: - the management delegation was not based upon a study of opportunity for establishing the economic, financial, social and environmental reasons in order to justify the granting of the concession, this fact determining disorganization and counter- performance. - There are lots of situations where the local public administration authorities did not elaborate a medium and long term strategy for the development and operating water and drainage services, neither ante nor post lease. The handling over of the patrimony to the concessionaires, for operating it, was not made based on the inventory and accounting evidences of the entity that licensee the services. So, although there where operated by the concessionaire, certain components were not handled over or had doubtful situation. This fact determined, for those components, the risk of being alienated and the diminution of the due computing base when this was calculated based upon the leased fixed assets amortization. A special case is connected with the affiliation of the telescopic water supply network, submersing the block basements. This must be assigned either to the licensee public patrimony or to those blocks private property administration. Just a few of the authorities have themselves regulated these aspects, or in consensus with the concessionaires, and by means of regulations for organizing and operating the licensee public services. The necessary attention for establishing, adjusting and collecting the due for the licensed water supply and drainage public services was not paid in a convenient manner by the local public administration authorities. Thus, the concession beneficiaries did not establish the due level and the payment terms for it on an accurate efficient criteria basis, stated economically. In the license contract the due was established either as a fixed amount of money or based upon the leased fixed assets amortization value or as a percentage of the concessionaire net profit. The concession contract objectives and obligations were not established in accordance with the medium and long term strategy for development and operating of the water supply and drainage public services and they did not contain a minimum number of requirements, described as performance indicators stated in the specific legislation. The contractual obligations were not fulfilled, entirely and in accordance with the schedule, by the concessionaires, and the public entities did not take
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the necessary measures, including contract cancellation and the selection of other operators. The main reasons of not fulfilling the contract clauses by the concessionaires are connected with: their insufficient financial resources, those ones being, in general, local state trade companies with the same low level of capitalization and organization as the former self-managed entities, where they descended from; the services in discussion are not attractive, mainly because of the obsolete networks and the large quantity of water losses registered in the distribution networks; lack of opening towards free market economy shown by the local public administration authorities and so on. Usually the concessionaires neither adopted nor applied efficient methods to attract new clients and diminish the fraudulent consumers. Those kept collect, from the citizens, high tariffs for design and build junction cases to water network and connections to drainage network, despite the frame regulations approved by Government Decision 1591/2002, which stipulates that the operators are in charge with all the expenses for design, notification, put into execution, technical assistance, consultancy, reception and launch into operation. The contractual commitments were not fully observed by the authorities that leased the services. Thus, both the operating and development of the systems and the realization of the concessionaire commitments were influenced in a negative manner. Even when it was established by the concessionaires in a realistic manner, the adjustment/increasing of the tariffs was not approved by the public authorities in due time and in the demanded amount. No subventions were conceded for the tariff differences, so that the concessionaires could not constitute their own financial sources, necessary for the development and fulfillment of the contract objectives, as well. Actually, the authorities practiced a covered social protection, indirectly transferring its efforts towards the concessionaires by all risks, including diminish of its autonomy degree, financial losses, contracted performance indicators non-fulfillment and keep the system work under standards. According to legal regulations (art. 33 of Law 219/1998, art. 13 and 18 of Law 326/2001 and so on), supervising and control of the way the concessionaire duties are carried out represent an obligation and also a right in which the local public administration authorities were not implied enough. There were not organized distinctive structures by the authorities to
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supervise and control how the concession contracts are going on. It was considered that the participation of local counselors in the shareholders general assembly and/or in the concessionaire council boards or the delegation of these duties to some compartments of the mayor houses was enough. The auditors noted the existence of a cooperation lack and an insufficient data exchange between local public administration authorities, concessionaire operators and the set up supervising structures. It was also noticed a scanty attention, both from the part of local public administration authorities and from operators too, paid to prevention and penalization of the environment pollution caused by pouring used waters with effluents into drainage networks. The local public administration authorities and the water supply and drainage public services operators, as well, took no interest in the importance and the role the internal audit can play in detecting weak points of an activity, the reasons that determined the lack of performance and the identification of the most efficient measures to be taken for remedy. Given the presented findings, it results that the water supply and drainage public services concession process represented, generally, a noneconomic, non-efficient and non-effective option because of not succeeding in touching its aim to rehabilitate and develop these services. 4. Main Recommendations 4.1. Applicable to local public administration authorities level Local public administration authorities have to establish, as main target for the water supply and drainage services, the achievement of a quality level as high as possible by means of medium and long term strategies for development and operation and of organizing and operating regulations for the public services in discussion, as well. Identifying the viable solutions for establishing the owners and so the responsibilities for maintain and repair the telescopic water supply networks, submersing the joint proprietors block of flats. Paying the proper attention to establishing, adjustment and collecting of the due owed by concession.

 Applying the penalties as contractual clauses whenever the concessionaires are not fulfilling their duties, including contract cancellation and selection of new operators. Observing the specific legislation, the contractual clauses and own duties, conforming to free market mechanisms and abandoning the social protection made on behalf of the concessionaires. Aware the local public administrative authorities managers about the internal audit role and importance and using it as a mean to identify the most efficient methods for improving these services performance. 4.2. Applicable to water supply and drainage public services operators level Fulfilling the duties, stipulated in the license contract, totally and according the schedule. Adoption and using efficient methods for luring new clients and diminishing the number of fraudulent consumers and observance the frame regulations endorsed by Government Decision no 1591/2002. Using the internal audit as a mean to identify the most efficient methods for achieving these services performance. 4.3. Applicable to governmental level Completion and improving the legal frame concerning:

Stimulating specifications, addressed to concessionaires, for taking into consideration, as a priority, the branching metering. Indebtedness for organizing inspection structures for the environment pollution, at the water supply and drainage public services operators level, preparing methodological rules for implementing, at a local level, the principle polluter pays and all the other conditions stipulated in the E.U. green card. Establishing priorities and constraints for payment of water and drainage invoices in due time, similar to those used for electricity, natural gas etc. Specific regulations for stimulating the set up and work of water supply and drainage regional public services operators. Establishing the operators indebtedness to implement and maintain a quality management system, certified by specialized authorities.