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The Hungarian water sector

A short summary of the Hungarian Water Utility Sector

Areas of operation of the Water Utility Services in Hungary

Water utility services are focusing on two main basic activities in Hungary: the provision of piped drinking water and waste water treatment services.
The provision of drinking water services cover the whole chain from water extraction to the delivery of water to the customer, including the provision of water in the case of fire emergencies.

Sewage disposal and sewage treatment activities include the collection of sewage from its source of origin, disposal, purification, the further transportation of treated sewage to the reception area and the disposal of sewage sludge.
In addition to the production-operation processes, communication with the customer, billing, water quality control and troubleshooting are also part of the activities of the water utility services.

The infrastructure of the water utility services in Hungary

All Hungarian municipalities are connected to the drinking water system and 95% of households have connection to the system. The annual water consumption is about 440 million m3 and 75% of this is related to domestic use. The average daily water consumption per person is 90-100 litres.

In Hungary drinking water in healthy and can be consumed without any restrictions in most settlements. In those areas, where there are some restrictions in force, there are EU founded projects - aiming at technological improvements – in order to improve the quality of water in these regions. On a national average the availability of water reserves are adequate, the security of supply with regards to the availability of water sources is guaranteed.

The coverage of the sewerage system was at a lower level in the previous years in comparison to the drinking water system but by 2013, 75% of households were connected to the system. The new or modernized treatment plants decrease significantly their footprint on the environment, but in the case of smaller treatment plants in villages with smaller installed capacities, lower scale of operation efficiency and lower rate of utilization have higher unit costs of operation.

Specific responsibilities within the water utility sector

The water utility companies, so to say establishments responsible for the provision of drinking water, waste water disposal and treatment services can be owned exclusively by local municipalities or the state. It is also the responsibility of the local governments or in certain cases the state itself - specifically defined in a legislation - to provide for the customers with these services.

The asset owner (the municipality and the state) sign a contract of service provision with the service provider (utility company). The type of contract can be of three different types: an “asset management contract”, “concession” or a “rent-operation scheme”. These can have different legal provisions and obligations depending on the type of contract. The “concession” contract provides the widest range of rights and the largest responsibility to the operator. The smallest responsibility and narrowest scope of area are provided to the service provider by the “rent-operation” type of contract.

The service providers during the validity of contract of operation can carry out their water utility services only in the possession of the operating licence that is issued by the Hungarian Energy and Public Utility Regulatory Authority (MEKH).
With the Water Utility Act entering into force in 2011, the local municipalities (local governments) lost their price setting authority. MEKH is providing the Minister responsible for the supervision of the sector with the suggested tariffs. The minister taking into consideration these tariffs will define in a decree the official tariffs for each water utility provider / water utility system or the type of water utility provision activity.

As a heritage of the previously decentralised tariff setting system, at the moment the number of different tariffs used by the utility companies is in the scale of 10.000 with significant differences in their rates.

The integration process in the water utility sector (2012-2016)

The transformation of the water utility sector’s market structure begun with the Water Utility Act entering into force and the transformation process is expected to be finalised by the end of 2016. The regulation is aiming to continuously increase the minimal value for the number of customers - using the services of the given utility company - expressed by a complex index the so called “user equivalent” in order to stimulate the integration process of the water utility sector.

As a consequence of the integration process, the number of water utility companies decreased from about 400 companies in 2011 to 41 by January 2016. In five of the corporations the major shareholder is the Hungarian state, while in two companies the capital city has a majority ownership and in the 35 remaining companies, local municipalities have a majority ownership. The vast majority of the utility companies are exclusively in national property but in four corporations foreign service providers also have a minority ownership. The sector provides job opportunities for about 20.000 employees.

The economic status of the water utility companies

90% of the income of the water utility companies are derived from their basic activities with the continuous increase of the share of the incomes from wastewater treatment activities.
The water utility sector has a net annual income of 255 billion HUF. Until 2012 the aggregated income of the sector was increasing but in 2013 and 2014 as a consequence of the utility cost reduction (implemented by the Hungarian State) the net income was narrowing down and resulted in the overall loos of 20 billion HUF in income taking into consideration the whole sector.

Approximatively 45% of the industry’s costs are related to materials and bit more than 25% are paid for human resources, while 10% of the expenses are accountable for the depreciation value. The remaining 20% are other costs among which the most significant is the utility tax. In the water utility sector - similarly to other industries with a network - the fix costs are very huge and are estimated to be as high as 80% of the total costs.

The aggregated income (profit) of the sector until 2012 was at about 14 billion HUF on an annual basis. This profit fell to 0 HUF in 2013, which was the effect of tree economic measures: the utility tax is responsible for 12.5 billion HUF of losses, while the implementation of the utility cost reduction was somewhat compensated by the increase in incomes from the new connections to the sewage system. By 2014 there was a further decline in profits on average basis within the sector, since the aggregated operating profit of the sector – as a result of the utility cost reduction’s effect for the complete year – could be kept at around 0 HUF only by the injection of a 10 billion HUF governmental aid.

The sectoral results are the outcome of profitable and non-profitable companies, while the majority of the utility companies had a 0 HUF profit in 2013 and 2014.

In the current operational environment (reduction of utility prices, uncovered tax burden, stable employment rate) with decreasing incomes and increasing costs, the water utility sector has reached its limits concerning efficiency increasing measures and by 2014 as a result of the utility cost reduction and the utility tax on the companies, the water utility sector became unprofitable.