DRINKING WATER - PRINCIPLES AND PRACTICES
Finances
WATER COMPANIES
4.00 3.50 - 5.50
3.90
0.70
0.60
Price in EUR/l
0.50 0.45
0.40
0.40
0.30
0.20
0.10
0.00077 0.0016
0.00 ta bo
No p w
sp sta
sp pe
ta ren
ttl
p th
e
rin ur
rin rm
re
su
D
or at d
w e
g an
g ar
d- er w
at
w t
w ke
Ho at
er
at
at t
lla er
er
er
nd
,FINANCES WATER COMPANIES
Framework
This module is about the financial aspects of the public drinking water supply. On a company level,
the balance sheet of a water and water tarifs are discussed. Specific details will be presented on the
investment and operational costs, as well as cost comparisons for alternatives.
Introduction
This module has the following contents:
1. Introduction
2. Water company as an enterprise
2.1 Drinking water supply as a monopoly
2.2 Financial annual report
2.3 Rate determination
2.4 Benchmark comparison of water companies
3. Investment costs
3.1 Definition of investment costs
3.2 Uniform structure of investment costs
3.3 Index of investment costs
3.4 Investment costs and capacity
4. Operational costs
4.1 Definition of operational costs
4.2 Uniform structure of operational costs
5. Cost comparison of alternatives
5.1 Comparison of investment costs with phased building
5.2 Comparison of investment and operational costs
Literature and websites
Questions and applications
Answers
Study goals
After having studied this module, you will be able to:
• identify the terms balance sheet, profit and loss account, investment costs, capital costs, and opera-
tional costs
• calculate tariffs for a cost-covering drinking water supply
• prepare an estimate of the investment costs
• prepare an estimate of the operational costs
• prepare a cost comparison of alternatives
154
,WATER COMPANIES FINANCES
1. Introduction Competition makes sure that the company reaches
a high level of efficiency, and the company will
A water company is not only a technical company, pursue maximum profits and, therefore, cost
but also a concern. Therefore, many different fac- reductions.
ets play a part, for example, the social aspects The company is, in this way, controlled by the
(e.g., staff, clients) and the financial aspects (e.g., market. The government mainly oversees that the
economy). different suppliers in the market do not make inad-
missible market deals, that the supplied products
The financial aspects have a lot in common with are acceptable with relation to health and safety,
the technical aspects. A water company invests and that the production and transportation of used
in a new infrastructure (i.e., production plants and products take place in an environmentally and
distribution network), spends money on its opera- technically sound way.
tion (staff, energy and chemicals), and has to make
sure that the expenses are covered by its income Monopoly
(standing charges and consumption rates). Having described how typical private companies
are run, it can now be shown how a water company
This module looks at the financial aspects of a actually differs greatly from this.
water company. First of all, a water company is a monopoly within
First, the water company is presented as a con- the distribution area assigned by the government.
cern. Specific attention is given to the fact that a The most important arguments for an assigned
water company is a legal monopoly. Therefore, monopoly are that
the main objective of the concern is not making a - the distribution of water determines the price
profit, but covering costs. to such an extent that it is never economically
The financial strength and conditions of a company attractive to have more suppliers
become clearer after reading the (financial) annual - the quality and availability of drinking water
report. Understanding the report will make rate is of such social importance that it should not
fixing clearer and a comparison across different be pressured by economic considerations of
companies possible. companies
Investments and operational issues are important - the drinking water supply does not qualify for
aspects within a water supply company. These operation by different companies, because this
aspects will, therefore, be specifically dealt with will make quality responsibilities and delivery
and elaborated upon. Finally, items playing a role guarantees very unclear. This is the reason
in comparing the costs for various alternatives will why the government pursues the guarantee of
be presented. quality (always clean and healthy) and quantity
(always in the needed quantities under suffi-
cient pressure) as an integral responsibility of
2. Water company as an enterprise one single company from source to tap
2.1 Drinking water supply as a
monopoly
A water company looks like a typical enterprise.
Enterprises typically operate in a free market,
where other suppliers are active as well. The com-
pany exists as long as clients are willing to buy the
product for a price at which the company can make
a profit. In such a situation, the company is forced,
by the market, to balance price and quality.
Figure 1 - Money and water: aqueduct on €5 note
155
, FINANCES WATER COMPANIES
Government supervision - Profit (and also losses) can be obtained non-
Because of a lack of control by the market, control strategically, if the sales and the costs differ
of a water company by the government is neces- from what was estimated when the rates were
sary. This is included in the Water Supply Act, being determined
where several supervisors are assigned (respon-
sibility/authority of the cabinet minister, quality con- A special form of company profit is the dividend
trol by the ministry, supervision by public boards paid to local authorities.
(in municipalities and provinces). This could be a significant sum, as water rates
Next to this, the water companies in the Netherlands sometimes included hidden municipal taxes.
have created extra possibilities for a public mutual Nowadays this practice is forbidden by law.
comparison of companies (VEWIN benchmark).
2.2 Financial annual report
The government’s supervision of the water com- Because of their social position water companies
pany is relatively simple, because all Dutch water feel more or less obligated to maintain an open
companies are government-owned limited liability communication with their consumers.
companies, or municipal services (Amsterdam). An important instrument for this communication is
In a government-owned limited liability company, the company’s annual report (Figure 2). An annual
the company’s stocks are owned by the provinces report gives a clear summary of the financial
and municipalities. The owners are the democrati- management of a water company. In their annual
cally chosen representatives of the consumers, in report, most water companies give consumers
as far as the stocks are proportionally divided. With information about their technical and organiza-
this, a balanced and controllable consideration is tional developments.
possible between quality, reliability, nature con-
servation, and costs. The stocks usually represent A financial annual report consists of a balance
only a symbolic value; in which the owners have sheet (list of possessions and debts at the end of
a minimal capital contribution (and, therefore, no the financial year) and a profit and loss account (list
expectations of capital return). of incomes and expenses in the financial year).
Profit Balance sheet
A water company does not strive to make a profit, Table 1 shows an example of a water company’s
but looks after the public interest, at cost. balance sheet.
An important basic principle is that consumers pay This table shows that more than 95% of the pos-
for the actual costs, and not for future expenses. sessions of this water company are tangible fixed
Moreover they might count on a high cost effi- assets (e.g., buildings, installations and pipes).
ciency within the water company.
However, making a profit is allowed under the fol-
lowing circumstances:
- Profit can be obtained strategically, when it is
used for building up company capital, thereby
gaining a better position on the capital market,
which can be of importance in securing loans
at acceptable interest rates
- Profit can be obtained strategically to avoid
sudden large increases in rates. For that rea-
son, the decision can be made for gradual,
step-by-step increases and, through this, a Figure 2 - Front page of an annual report of a water
capital reserve is built up company
156
Finances
WATER COMPANIES
4.00 3.50 - 5.50
3.90
0.70
0.60
Price in EUR/l
0.50 0.45
0.40
0.40
0.30
0.20
0.10
0.00077 0.0016
0.00 ta bo
No p w
sp sta
sp pe
ta ren
ttl
p th
e
rin ur
rin rm
re
su
D
or at d
w e
g an
g ar
d- er w
at
w t
w ke
Ho at
er
at
at t
lla er
er
er
nd
,FINANCES WATER COMPANIES
Framework
This module is about the financial aspects of the public drinking water supply. On a company level,
the balance sheet of a water and water tarifs are discussed. Specific details will be presented on the
investment and operational costs, as well as cost comparisons for alternatives.
Introduction
This module has the following contents:
1. Introduction
2. Water company as an enterprise
2.1 Drinking water supply as a monopoly
2.2 Financial annual report
2.3 Rate determination
2.4 Benchmark comparison of water companies
3. Investment costs
3.1 Definition of investment costs
3.2 Uniform structure of investment costs
3.3 Index of investment costs
3.4 Investment costs and capacity
4. Operational costs
4.1 Definition of operational costs
4.2 Uniform structure of operational costs
5. Cost comparison of alternatives
5.1 Comparison of investment costs with phased building
5.2 Comparison of investment and operational costs
Literature and websites
Questions and applications
Answers
Study goals
After having studied this module, you will be able to:
• identify the terms balance sheet, profit and loss account, investment costs, capital costs, and opera-
tional costs
• calculate tariffs for a cost-covering drinking water supply
• prepare an estimate of the investment costs
• prepare an estimate of the operational costs
• prepare a cost comparison of alternatives
154
,WATER COMPANIES FINANCES
1. Introduction Competition makes sure that the company reaches
a high level of efficiency, and the company will
A water company is not only a technical company, pursue maximum profits and, therefore, cost
but also a concern. Therefore, many different fac- reductions.
ets play a part, for example, the social aspects The company is, in this way, controlled by the
(e.g., staff, clients) and the financial aspects (e.g., market. The government mainly oversees that the
economy). different suppliers in the market do not make inad-
missible market deals, that the supplied products
The financial aspects have a lot in common with are acceptable with relation to health and safety,
the technical aspects. A water company invests and that the production and transportation of used
in a new infrastructure (i.e., production plants and products take place in an environmentally and
distribution network), spends money on its opera- technically sound way.
tion (staff, energy and chemicals), and has to make
sure that the expenses are covered by its income Monopoly
(standing charges and consumption rates). Having described how typical private companies
are run, it can now be shown how a water company
This module looks at the financial aspects of a actually differs greatly from this.
water company. First of all, a water company is a monopoly within
First, the water company is presented as a con- the distribution area assigned by the government.
cern. Specific attention is given to the fact that a The most important arguments for an assigned
water company is a legal monopoly. Therefore, monopoly are that
the main objective of the concern is not making a - the distribution of water determines the price
profit, but covering costs. to such an extent that it is never economically
The financial strength and conditions of a company attractive to have more suppliers
become clearer after reading the (financial) annual - the quality and availability of drinking water
report. Understanding the report will make rate is of such social importance that it should not
fixing clearer and a comparison across different be pressured by economic considerations of
companies possible. companies
Investments and operational issues are important - the drinking water supply does not qualify for
aspects within a water supply company. These operation by different companies, because this
aspects will, therefore, be specifically dealt with will make quality responsibilities and delivery
and elaborated upon. Finally, items playing a role guarantees very unclear. This is the reason
in comparing the costs for various alternatives will why the government pursues the guarantee of
be presented. quality (always clean and healthy) and quantity
(always in the needed quantities under suffi-
cient pressure) as an integral responsibility of
2. Water company as an enterprise one single company from source to tap
2.1 Drinking water supply as a
monopoly
A water company looks like a typical enterprise.
Enterprises typically operate in a free market,
where other suppliers are active as well. The com-
pany exists as long as clients are willing to buy the
product for a price at which the company can make
a profit. In such a situation, the company is forced,
by the market, to balance price and quality.
Figure 1 - Money and water: aqueduct on €5 note
155
, FINANCES WATER COMPANIES
Government supervision - Profit (and also losses) can be obtained non-
Because of a lack of control by the market, control strategically, if the sales and the costs differ
of a water company by the government is neces- from what was estimated when the rates were
sary. This is included in the Water Supply Act, being determined
where several supervisors are assigned (respon-
sibility/authority of the cabinet minister, quality con- A special form of company profit is the dividend
trol by the ministry, supervision by public boards paid to local authorities.
(in municipalities and provinces). This could be a significant sum, as water rates
Next to this, the water companies in the Netherlands sometimes included hidden municipal taxes.
have created extra possibilities for a public mutual Nowadays this practice is forbidden by law.
comparison of companies (VEWIN benchmark).
2.2 Financial annual report
The government’s supervision of the water com- Because of their social position water companies
pany is relatively simple, because all Dutch water feel more or less obligated to maintain an open
companies are government-owned limited liability communication with their consumers.
companies, or municipal services (Amsterdam). An important instrument for this communication is
In a government-owned limited liability company, the company’s annual report (Figure 2). An annual
the company’s stocks are owned by the provinces report gives a clear summary of the financial
and municipalities. The owners are the democrati- management of a water company. In their annual
cally chosen representatives of the consumers, in report, most water companies give consumers
as far as the stocks are proportionally divided. With information about their technical and organiza-
this, a balanced and controllable consideration is tional developments.
possible between quality, reliability, nature con-
servation, and costs. The stocks usually represent A financial annual report consists of a balance
only a symbolic value; in which the owners have sheet (list of possessions and debts at the end of
a minimal capital contribution (and, therefore, no the financial year) and a profit and loss account (list
expectations of capital return). of incomes and expenses in the financial year).
Profit Balance sheet
A water company does not strive to make a profit, Table 1 shows an example of a water company’s
but looks after the public interest, at cost. balance sheet.
An important basic principle is that consumers pay This table shows that more than 95% of the pos-
for the actual costs, and not for future expenses. sessions of this water company are tangible fixed
Moreover they might count on a high cost effi- assets (e.g., buildings, installations and pipes).
ciency within the water company.
However, making a profit is allowed under the fol-
lowing circumstances:
- Profit can be obtained strategically, when it is
used for building up company capital, thereby
gaining a better position on the capital market,
which can be of importance in securing loans
at acceptable interest rates
- Profit can be obtained strategically to avoid
sudden large increases in rates. For that rea-
son, the decision can be made for gradual,
step-by-step increases and, through this, a Figure 2 - Front page of an annual report of a water
capital reserve is built up company
156
