WATER SUPPLY IN PALERMO

Transcription

1 EX POST EVALUATION OF INVESTMENT PROJECTS CO-FINANCED BY THE EUROPEAN REGIONAL DEVELOPMENT FUND (ERDF) OR COHESION FUND (CF) IN THE PERIOD WATER SUPPLY IN PALERMO PREPARED BY: CSIL, CENTRE FOR INDUSTRIAL STUDIES, MILAN PREPARED FOR: EUROPEAN COMMISSION DIRECTORATE-GENERAL REGIONAL POLICY POLICY DEVELOPMENT EVALUATION MILAN, SEPTEMBER 5, 2012

2 This study is carried out by a team selected by the Evaluation Unit, DG Regional Policy, European Commission, through a call for tenders by open procedure no 2010.CE.16.B.AT.036. The consortium selected comprises CSIL Centre for Industrial Studies (lead partner Milan) and DKM Economic Consultants (Dublin). The Core Team comprises: - Scientific Director: Massimo Florio, CSIL and University of Milan; - Project Coordinators: Silvia Vignetti and Julie Pellegrin, CSIL; - External experts: Ginés de Rus (University of Las Palmas, Spain), Per-Olov Johansson (Stockholm School of Economics, Sweden) and Eduardo Ley (World Bank, Washington, D.C.); - Senior experts: Ugo Finzi, Mario Genco, Annette Hughes and Marcello Martinez; - Task managers: John Lawlor, Julie Pellegrin and Davide Sartori; - Project analysts: Emanuela Sirtori, Gelsomina Catalano and Rory Mc Monagle. A network of country experts provides the geographical coverage for the field analysis: Roland Blomeyer, Fernando Santos (Blomeyer and Sanz Guadalajara), Andrea Moroni (CSIL Milano), Antonis Moussios, Panos Liveris (Eurotec - Thessaloniki), Marta Sánchez-Borràs, Mateu Turró (CENIT Barcelona), Ernestine Woelger (DKM Dublin). The authors of this report are Gelsomina Catalano, Mario Genco and Silvia Vignetti of CSIL. The authors are grateful for the very helpful comments from the EC staff and particularly to Veronica Gaffey, Anna Burylo and Kai Stryczynski. They also express their gratitude to all stakeholders who agreed to respond to the team s questions and contributed to the realisation of the case study. The authors are responsible for any remaining errors or omissions. Quotation is authorised as long as the source is acknowledged. Cover: Fontana Pretoria, picture by Bernhard J. Scheuvens (April, 2007).

3 TABLE OF CONTENTS EXECUTIVE SUMMARY PROJECT DESCRIPTION CONTEXT ITALIAN LEGAL FRAMEWORK IN THE FIELD OF WATER SUPPLY STRUCTURAL FEATURES AND SERVICE DELIVERED CURRENT PERFORMANCE ORIGIN AND HISTORY BACKGROUND FINANCING DECISION PROJECT IMPLEMENTATION AND ADDITIONAL INVESTMENT NEEDS LONG-TERM DEVELOPMENT EFFECTS KEY FINDINGS DIRECT WELFARE AND ECONOMIC GROWTH ENDOGENOUS DYNAMICS INSTITUTIONAL QUALITY ENVIRONMENTAL EFFECTS TERRITORIAL AND SOCIAL COHESION SOCIAL HAPPINESS DETERMINANTS OF PROJECT OUTCOMES KEY FINDINGS PROJECT DESIGN AND FORECASTING CAPACITY PROJECT GOVERNANCE CONCLUSIONS...57 ANNEX I. METHODOLOGY OF EVALUATION...59 ANNEX II. COST-BENEFIT ANALYSIS...65 ANNEX III. MAP OF STAKEHOLDERS...95 ANNEX IV. LIST OF INTERVIEWEES...97 ANNEX V. REFERENCES...99

4 LIST OF ABBREVIATIONS AMAP ANCI AOTA APS CBA CF CIPE CSF DG Regio EC ECU EIB ERDF ESF EU GDP HDPE IMF IWS NUTS OTA PPP PRGA R.A.C.T. SCF Azienda Municipalizzata Acquedotto Palermo (Municipal Company Palermo Aqueduct) Associazione Nazionale Comuni Italiani (National Association of Italian Municipalities) Authority of Optimal Territorial Ambit Acque Potabili Siciliane s.p.a. (administrator of IWS in the remainder of OTA 1 in Palermo) Cost-Benefit Analysis Cohesion Fund Comitato Interministeriale per la Programmazione Economica (Inter-Ministerial Committee for Economic Planning) Community Strategic Framework Directorate General for Regional Policy European Commission European Current Unit European Investment Bank European Regional Development Fund European Social Fund European Union Gross Domestic Product High Density Polyethylene International Monetary Fund Integrated Water Service Nomenclature of Territorial Statistical Units Optimal Territorial Ambit Public-Private Partnership Piano Regolatore Generale degli Acquedotti (Aqueduct General Plan) Regional Administrative Technical Committee Standard Conversion Factor

5 TOP WTA WTP Three-year operational plan Willingness to accept Willingness to pay

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7 EXECUTIVE SUMMARY The present case study appraises an infrastructure project aimed at renovating the water distribution network in the city of Palermo, in the Italian region of Sicily. After almost ten years of project implementation the aim of the present ex-post evaluation is to establish the extent to which this infrastructure project has affected the lives of the inhabitants of Palermo and what long-term effects it has produced. The analysis draws from an ex-post Cost-Benefit Analysis - CBA 1 and from a set of qualitative evidence, both secondary (technical reports, official reports, press articles, books and research papers) and primary evidence (15 interviews with key stakeholders and experts were carried out in the period September-October ). The overall approach and methodology followed in the project is briefly recounted in the underneath Box and, more extensively, in Annex I. OVERALL APPROACH AND METHODOLOGY The Conceptual Framework developed in the First Intermediate Report has been developed starting from the evaluation questions included in the ToRs 3, and further specified and organised as per the team s understanding. In particular, the Team identified three relevant dimensions of analysis: a. The object of the evaluation (the WHAT ): this relates to the typologies of long-term contributions which can be observed. Starting with the typologies identified in the ToR (socio-economic development and quality of life) the Team developed the following classification of long-term effects: Economic development (including effects on GDP growth and endogenous dynamics) and Quality of life, synonymous with additional social wellbeing, i.e. including effects that are not captured by the economic variables. Quality of life, in turn, has been divided into: social cohesion, territorial cohesion, institutional learning, environmental effects and social happiness. b. The timing of the long-term effects (the WHEN ): this dimension relates to the points in the project s lifetime at which the effects materialise for the first time (short-term dimension) and stabilise (long-term dimension). The proper timing of an evaluation and the role it can have in relation to the project s implementation is also discussed here. c. The determinants of the project s performance (the HOW ): the assumption here is that five aspects of the project s implementation and their interplay are crucial for the project s final performance. These aspects are: project design, forecasting capacity, governance, context and managerial response. Five Working Hypotheses are related to these dimensions and explain how each of them can influence the generation of the project s short or long-term effects. On the basis of this conceptualisation, a set of evaluation questions was developed and aims to guide the entire study and to support the provision of conclusions and recommendations. The methodology developed to address the evaluation questions consists of a combination of quantitative (Cost Benefit Analysis) and qualitative (interviews, surveys, searching in governments and newspapers archives, etc.) techniques, integrated in such a way as to produce ten project histories. CBA is an appropriate analytical approach for the ex-post evaluation because it can provide quantification or indications about some of the long-term effects produced by the project. However, the most important contribution of the CBA exercise is to provide a framework of analysis to disentangle the most crucial 1 Data, hypotheses and results are discussed in Annex II. 2 See Annex III for a list of interviewees. 3 They are the following: What kind of long-term contributions can be identified for different types of investment in the field of environment and transport infrastructure? How are these long-term contributions generated for different types of investment in the field of environment and transport infrastructure, i.e., what is the causal chain between certain short-term socio-economic returns and long-term returns from investment? What is the minimum and average time needed for a given long-term contribution to materialise and stabilise? What are these time spans for different types of investment in the field of environment and transport infrastructure? What are the existing evaluation methods to capture a given long-term contribution for different types of investment in the field of environment and transport infrastructure? 1

8 aspects of the projects ex-post performance and final outcome. Qualitative analysis is on the other hand addressed more to understanding the underlining causes and courses of action of the delivery process. On the basis of the findings provided by the ten case studies, the Final Report will draw lessons along the key dimensions identified of what, when and how. Source: Authors The aqueduct of the Municipality of Palermo is a striking piece of infrastructure built at the end of the XIX century to serve the historical central districts of the city 4. During the urban expansion experienced by the city in the 1950s and 1960s additional sections of the water distribution network were built, in response to the needs of a booming population, in the absence of a systematic and strategic plan. At the beginning of the 1980s the entire water system infrastructure was in a state of obsolescence. Moreover, the public company in charge of the service delivery had poor internal technical capacity and lacked a strong strategic vision, due also to a political context influenced by corruption and organised crime. As a consequence, the citizens of Palermo suffered from severe water shortages, and the water was rationed during the day and the week in order both to more effectively use the limited available water and to reduce water losses, by shortening the periods of time during which the networks were kept under pressure (even though this parameter was set at a very low level). Citizens coped with this shortage by collecting water in domestic tanks operated with electric pumps in order to compensate for the low service pressure. After serious episodes of drought at the end of the 1970s, the municipal company (AMAP - Azienda Municipalizzata Acquedotto di Palermo) engaged a group of experts to draft a study to identify a long term solution to the problem. In contrast to the common perception that water shortages were due to the scarcity of water sources and dry weather, the study correctly identified heavy losses in the obsolete distribution network as the main source of inefficiency in the system. It was however only at the beginning of the 1990s that a Master Plan was prepared based on the findings in that study. The result was an ambitious and highly demanding (in terms of financial resources as well as time and technical capacity) plan for the complete restructuring of the entire system. However, some of the technical details and solutions identified were controversial. In particular, water demand was overestimated (assuming population increase while it was actually decreasing at the time), leading to overcapacity in the pipes and supply system design. It was thanks to the funds available through the EU programming period that project implementation gained momentum. Due to funds availability and administrative reasons related to the readiness of the projects, only some components of the Master Plan were selected for implementation, namely the renovation of the oldest three sub-networks of 4 The whole system - originally consisting of a canal, over 67 km long (the old Scillato aqueduct, still in operation), two masonry tanks on the San Ciro site, and the water system of the town centre at that time (length 80 Km s) - was built in only three years through project financing, one of the oldest examples of this kind of PPP in Italy. The concession for the operation of the aqueduct and of the water service in Palermo for sixty years was signed on February 12 th, 1898 between the Municipality, which co-financed the investment with 30% of the capital cost, and the company which won the tender, namely the Scillato Water Company (Società Acqua di Scillato) of the Biglia brothers and Vanni. 2

9 the distribution network, located in the historical centre. Soon after, thanks to additional funds availability, three additional sub-networks plus the completion of the city bypass to facilitate water distribution in the north-west district, plus a system of automatic supervision and remote control of the water, were also financed. The construction phase started in 1997 and the initially planned works were completed by The first section that was completed started to operate in In order to cover the investment of EUR 110 million 5, the Municipality of Palermo benefitted from co-financing of the European Regional Development Fund (ERDF) for a total of EUR 44 million (40% of the total investment). In addition, other EUR 44 million were provided from the Italian State. Since the EU required the municipal company (AMAP) to co-finance at least 20% of the total cost of the projects in accordance with a project financing scheme, an EIB loan was applied for by AMAP. After the project s independent appraisal, the EIB approved the loan conditional on the addition of a metering system to the planned investment. The works were implemented practically on time and with cost savings, thanks to further adjustments during the design phase and cost reductions at the tendering stage. Part of the additional resources made available by the EIB and saved on the investment costs were used by AMAP for additional investments undertaken by the municipal company to provide new connections for users 6, which improved the metering system and had the side-effect of identifying illegal connections to the old network. In total, the past investment costs considered in the analysis amount to EUR 120 million and the co-financing share of each source of financing is recorded in the following Table. The project has proven to be financially sustainable, as revenues have been able to cover costs for each year since 1997, 7 and a similar sustainability pattern is expected in the future. OVERVIEW OF INVESTMENT COSTS AND SOURCES OF FINANCING Financing period First year of operation 2002 Total investment costs (2011 prices) EUR 120 million 100% Sources of financing and co-funding rates over the total investment costs Cohesion Fund EUR 0 0% European Regional Development Fund EUR 44 million 37% European Investment Bank EUR 22 million 18% National-regional-local public contribution EUR 54 million 45% Private capital EUR 0 0% Evidence available from the interviews and documents collected supports the assessment of a strong improvement in the quality of life of citizens brought about by the implementation of 5 Unless otherwise specified, this and all the following cash quantities are expressed in constant 2011 prices. 6 Originally not planned in the projects on the sub-networks. 7 The cumulated net cash flows criterion in the EC Guide defines a project as financially sustainable if there is no year in which cumulated costs outweighs revenues (EU Commission, 2008). 3

10 the project. In particular, 450 km of new pipes, made of High Density Polyethylene (with an innovative technology implemented for the first time in Italy for a water distribution system) completely eliminated the problem of physical losses in the six sub-networks, serving about 60% of the total municipal population. Although water losses were still severe in the old part of the network, it was decided to use the water savings in the restored section of the network to allow for a continuous water supply, thus eliminating water supply disruptions in almost all the network (in about 25% of the network water is still rationed because the pipes are so obsolete that they could not cope with a continuous supply without a serious increase in pipe bursts and other associated problems). The more efficient distribution was actually used to provide a more reliable water service to the population rather than reducing water losses, making it possible for the already available water supply to cope with existing demand. It is worth noting in fact that neither the total water volume available nor the per capita water consumption changed as a result of the project. As a result of the more reliable service the number of complaints by citizens dramatically dropped after the project s implementation. The more reliable and effective water supply in the entire city has direct welfare and economic growth effects in terms of avoided costs for the large share of the population benefitting from the continuous water supply, as compared to the situation before the project. This effect has been estimated in the CBA via the avoided costs of maintaining and operating the electric pumps to obtain water during the rationing, avoided time invested by private and commercial users in managing water storage and operating the pumps as well as in avoided maintenance costs for domestic appliances or electrical devices making use of water (e.g. washing machines). The discounted value of these social benefits amounts to about EUR 407 Million (2011 prices). Another direct growth effect for commercial and industrial users is improved productivity due to a more reliable water supply. This is however not quantified but only described in qualitative terms. Additional effects are recorded. First, the municipal company achieved more efficient management of the distribution system, in terms of operational and maintenance costs, with effects in terms of efficiency and growth. It was no longer necessary to invest resources in complex daily manoeuvres to operate the water network by shifts (i.e. supply-side operated network) and in repairing frequent breaks or disruptions in the pipes and other faults. This amounted to a saving of EUR 1.5 million on average per year, included in the CBA calculations. The saved resources were partially invested in other management activities, in particular in additional research related to the problem of water metering. A side effect of the project s implementation is in fact an improvement in the knowledge base and quality of the management of the municipal company (endogenous dynamics) following a shift from a supply-driven to a demand-driven delivery service, focused on providing the water actually demanded according to the users preferences, rather than pumping water into the system according to technical feasibility. This shift, together with the adoption of the new metering system, independent for each single sub-network, fostered the need to develop a more reliable and accurate account of water metering. This was achieved also via a number of innovative research studies in the field of water metering and investments in new user 4

11 connections. Results in this respect relate to a better understanding of the causes and the amount of water losses, a decrease in the so-called administrative losses (due to metering weaknesses rather than physical losses in the pipes) and a decrease in unpaid bills. This effect was not quantified but only qualitatively described. A minor long-term effect produced by the project implementation was a slight improvement in water quality, again a side effect of the improvement in distribution efficiency. The improvement in water quality is the result of a decrease in the risk of contamination events rather than improvement in the physical-chemical profile of the water. As a matter of fact, water quality was good even before the project and the project s implementation did not affect this aspect (natural sources and water purification treatments have not been modified by the project). Additional interventions realised later and independently from the initial project, addressing the adduction system and mainly aimed at coping with periods of drought, improved the available quantity of water from natural sources to be pumped in the system and contributed to mitigating the water loss problem. The project s long term effects were felt at the local level only and the main beneficiaries were the citizens and the municipal company. The most relevant effects (more reliable water supply and operational cost savings) materialised soon after the project s implementation (four years after the project s start), while side effects (knowledge improvement) only arose later on. Although the overall final assessment of the project s performance is positive, and the CBA provides a positive economic net present value supporting this finding (EUR 315 million at 2011 prices) 8, it should be also noted that, not only were a number of potential benefits not achieved, but additional investments foreseen and not implemented are at the origin of pending problems in the delivery and management of the water service. For a complete restructuring of the water system some additional interventions would have been necessary, such as a new water tank and the renovation of the rest of the sub-networks via the complete replacement of the old sub-networks which are obsolete and in particularly poor condition, a careful maintenance system, a shift to an asset management approach to service delivery (i.e. long-term planning of the best mix of capital and operating expenses according to principles of optimal resource allocation) and the revision and rationalization of the internal mains supplying the new sub-networks. The most striking effect of the failure to complete the plan is that water losses in the network still amount to 47% of the total supplied water, since the water savings in the restored sections are counterbalanced by an increase in water losses in the obsolete sections which are now continuously supplied (therefore water can now leak from the network 24 hours per day every day, rather than only during the times when water was being supplied). Moreover, the supply system of the new sub-networks remains the old, sub-optimal, one: for example a forecasted new water tank was not realised and this leaves one of the main sub-networks with unsuitable 8 The Economic rate of return of the project is equal to 14.68%. 5

12 values in the technical parameters for water pressures which cause underperformance of the entire sub-network. Pressures problems are recorded in some of the new sub-networks and tanks and electric pumps are still in use in some of the highest buildings to raise water to the top floors. Some of the current water pressure and low speed problems are also related to a forecasting error in the design phase. The entire system suffers from overcapacity since the demand forecast was significantly overestimated. A long term strategy of interventions prepared in the same years of the project implementation was actually addressing these problems with the revisions of the planned interventions, and design of new, more suitable, ones, according to more realistic demand forecasts. The best solution to the remaining problems related to water losses and pressure can be addressed by restructuring the remaining sections of the urban network. To this end, a new design needs to be developed with updated demand forecasts, since the original Master Plan suffers from the above-mentioned forecasting errors and its implementation today would lead to overcapacity in the system. Moreover, it would be advisable for the new plan to address technical specificities with up-to-date and innovative solutions, tailored to the current situation of the water network. The scientific discipline of water losses control is in fact fast developing and requires high profile and up-to-date technical expertise. The key determinant of project performance is project governance, which positively affected the project in the start-up phase but subsequently proved to be the impeding factor in the continuation of the entire renovation strategy. It was a positive combination of political will and technical and managerial capacity that facilitated in the initial phase, in such a short period of time and with such an advanced and efficient implementing capacity, project approval, and implementation. After many years during which the water supply in Palermo was affected by the influence of organised crime and a policy of clientelism in the selection of public managers, leading to a management approach far from the pursuit of the public interest, a cultural and political renovation, the so-called Spring of Palermo, saw a top level management board of the municipal company being selected and empowered to deal with the deeply rooted problem of water shortages. The water supply project was only the first step in a more far-reaching long-term strategy of innovation and capacity improvement in the public company, pursuing managerial and technical advancement underpinned by a new company vision, implemented by the new management board. With a pragmatic strategic view and the technical strength of a highly qualified team of experts, the project provided the correct and prompt solution to an urgent and relevant need of the population, overcoming some weaknesses in the project design and forecasts (such as for example the planned overcapacity stemming from demand overestimation). The taskforce in charge of project implementation not only provided a high standard of technical input, but was also able to establish fruitful professional relationships with the national authorities in charge of funds management and with the financing institutions (EU and EIB). In particular, the Italian desk of the EIB provided not only the funding but also technical support at the design phase, by requiring an additional component (i.e. the water metering system) for which 6

13 additional funds were also provided. As regards the European Commission, it played the role of funds provider with no additional input either in the planning or during the implementation phase. However, after the first interventions were successfully implemented, this ambitious innovative strategy was discontinued. The reasons for this stem from a number of events, including institutional conflicts and impasses in the implementation at regional level of national reform of the water supply system. Change in the management board of the municipal company definitively brought a halt to the magic moment of this restructuring process. Political impasse and managerial limitations were the cause of the failure to continue proper and comprehensive implementation of the remaining components of the original design. The adoption of a more strategic and comprehensive approach by the Commission would have been beneficial to the completion of the water network development plan, including the components already planned and never implemented. In this light the Commission could have urged the municipality and AMAP to complete the modernization of the water network within the framework of the following programming periods by removing all the obstacles that prevented the already planned interventions from being realized. Such pressure from an external player could have been critical in overcoming impasses in the governance structure. According to some interviewees, the EC, during the years of project s implementation, was actually in the position, by a modest amount of moral suasion, to push the consistency of the strategic planning and the allocation of the Structural Funds. For example, within the first three years Operational Plan approved by the Authority of the pertinent Optimal Territorial Ambit 9 an allocation of EUR 13 million 10 (funded with a mix of sources, including the EU funds 11 ) was foreseen with the aim to undertake some remaining necessary investments in the Palermo network. Such investments were actually never implemented. The overall project implementation suggests two relevant lessons that are worth to be underlined. First, technical competence and managerial capacity have proven to be crucial in order to implement the project both on time and without cost overruns. Indeed, the governance aspect deeply related to political issues can be rightfully considered a key necessary condition for the Palermo water supply system s success. A further lesson that can be drawn from this case-study concerns the importance that the institutional context and legislative framework have in creating a favourable context, by clearly setting out responsibilities and providing incentives for committing to long term investment plans. The EC could play a role in this respect. Even if so far most of the Commission s efforts have been put during the initial phase of the project s financial assessment, giving little relevance to the subsequent design and operational phases, systematic follow-up activities, 9 The service provided by AMAP S.p.A. is part of the Integrated Water Service organization of the Optimal Territorial Ambit 1 of Palermo prices. 11 Since the programming period, financing of investments in the water sector in Sicily has been ruled by Framework Programme Agreements, using in an integrated way both the ERDF and the various national funds. 7

14 the provision of financial funds conditional on a longer-term planning and a stronger supply of technical expertise would be highly advisable in the future years for facilitating the overall reconstruction process. 8

15 1 PROJECT DESCRIPTION This section provides a brief description of the Municipality of Palermo and its socio-economic context. The key structural features of the infrastructures and the service delivered, the context in which it takes place, the target population and the current performance of the project are outlined, in order to give a general description of the project which is the subject of this case study. 1.1 CONTEXT Palermo is a city in Southern Italy and is the capital of the autonomous region of Sicily, the largest Italian island. Palermo is located in the northwest of the region and stretches from a bay between two promontories inland on a plain known as Conca d oro ( Golden Valley ). The territory surrounding Palermo consists mainly of hills and mountains, which consist of rocks of dolomite (calcium and magnesium carbonate). Short plains stretch along the main water courses. These often swell in winter and run dry in summer. Figure 1.1 THE GEOGRAPHICAL POSITION OF THE MUNICIPALITY OF PALERMO Source: Authors The city of Palermo is an ancient centre in the Mediterranean Sea with a rich history of domination by different groups, layered and still visible in the city outline 12. The period under the Arabs, in the 9th century, saw the first important blossoming of the city, which became an important Arab centre in the Mediterranean. Under the subsequent domination of the Normans, magnificent buildings and artistic works were built, and the city prospered culturally 12 The first historical records indicate Palermo as a town founded by the Phoenicians, often in conflict with the neighboring cities of the Magna Graecia (Himera, Syracuse) and, a few centuries later, heavily involved in the Punic wars against Rome. 9

16 and economically. After the Angevins and the Spanish, during the 1700s Palermo was under the Bourbons, who enriched the city with baroque buildings. The following century the city was open to trade and relations with Europe. From the late 1800s to the early 1900s, thanks to a new wave of entrepreneurship, the city experienced a period of economic and cultural renewal. The service sector is currently the most developed one. In particular, the greatest number of economic activities is recorded in the wholesale and retail trades. In the industrial sector construction plays a dominant role. In the current year the city has 655,875 residents but this reflects a long and slow process of demographic decline that started at the beginning of the 1980s. The population decline of the last ten years is linked to the emigration of young people toward the North of Italy in search of employment and to the population s displacement to the neighbouring towns, especially the coastal ones. The negative trend is probably softened by the constant inflow of foreigners to the whole region and to Palermo. Figure 1.2 DEMOGRAPHIC TREND IN PALERMO, CONVERGENCE REGIONS AND ITALY, YEARLY PERCENTAGE CHANGE Source: Authors elaboration based on Eurostat data The Survey on perception of quality of life conducted by the European Union 13, reveals a general feeling of dissatisfaction among the population of Palermo. Job opportunities are the most important problem in the city. The province of Palermo registers one of the highest levels of unemployment (18.7%) among all the Italian provinces. Moreover, there is a high level of distrust related to public expenditure: 54% of citizens think that the city does not spend resources in a responsible way. 13 European Commission, March 2010, Survey on Perception of quality of life in 75 European cities, DG Regio, Policy development, Urban development, territorial cohesion, Brussels. 10

17 Another Survey provided by the Italian national institute Demopolis 14 on the quality of life and public services in Palermo, in 2008, not only supports the European Survey but highlights further critical aspects in the municipality. According to the report, the citizens of Palermo are dissatisfied with public services and family life conditions, and they are very critical of the local public administration. Youth unemployment, economic crisis and the cost of living, urban insecurity (the latter was not highlighted in the EU Survey) and lack of social services represent the main problems for citizens. The majority of citizens think that the quality of life is not acceptable in the city; according to 42% of those interviewed, quality of life has not changed in the last five years, while 32% think that it has worsened. The majority declare that among the major structural problems in the city are road traffic, the absence of adequate parking spaces, and urban waste. However, two-thirds of citizens are overall satisfied with water distribution. Recent data collected in the framework of the Italian performance reserve 15, which for the period set targets for a number of indicators related to services of general interest, indicates that the performance of Sicily in water distribution slightly improved in the period , performing better than the Southern Italy average. By contrast, a lower than average performance was recorded for the indicator on the number of users served by purification systems 16. In Palermo the level of insecurity perceived by its citizens is very high. According to the survey on the level of safety in urban municipalities, carried out by ANCI 17, it is the second most unsafe Italian municipality, after Naples, in the perception of its citizens. Juvenile and organized crime are the most relevant sources of social insecurity. According to a recent report on the impact of the Mafia on the economic, social and institutional conditions in the Italian Southern regions 18, Sicily is the region with the highest number of municipalities affected by the Mafia and, more specifically, the province of Palermo is one of the most affected among the nine provinces on the island ITALIAN LEGAL FRAMEWORK IN THE FIELD OF WATER SUPPLY The Italian regulation concerning water resources and water service has been long fragmented with an overlapping of different laws and acts. The law 36/94 on water resources, better known as the Galli Law 20, represents the first attempt to solve this excessive fragmentation. The first substantial innovation introduced by the law relates to the consolidation of water services (both water supply and waste water treatment) into larger management entities, the so called Integrated Water Services (IWS). The IWS consists of the whole of the public services of withdrawal, conveyance and distribution of water for civil uses, of sewage and wastewater 14 Demopolis, 2008, Palermo, città possible? Servizi e qualità della vita nel capoluogo siciliano, available at: 15 According to Art 50 EC Reg 1083/ Source: 17 ANCI (Associazione Nazionale Comuni Italiani), 2009, Oltre le ordinanze i sindaci e la sicurezza urbana, March The study identifies three indicators: the presence of mafia clans, the number of confiscated estates and disintegration of administration in the territory. 19 Censis, 2009, Il Condizionamento delle Mafie sull economia, sulla società e sulle istituzioni del Mezzogiorno, Rome. 11

18 treatment, and it must be provided in accordance with principles of efficiency, effectiveness and economy complying with national and community laws 21. The IWS is organized on the basis of the Optimal Territorial Ambits (OTAs) 22, which includes the municipalities that cooperate for the purposes of the IWS. The OTAs are associations of municipalities which in Italy are institutionally responsible for ensuring local public services to citizens 23. The rationale for the OTAs comes from the principle that the use of water for any purpose is permitted by law only in accordance with criteria of solidarity, with the aim of safeguarding the rights and the expectations of future generations to enjoy a healthy environmental heritage 24. The extent of their territories is defined by the Regions, by taking into consideration the main hydrographical boundaries and the boundaries of municipalities, in order to achieve adequate scale in terms of population served and water volume delivered. The OTAs are managed by territorial authorities (Authority of the OTA 25 or AOTA), constituted by the assembly of the mayors of the relevant municipalities, with the presidents of the provinces concerned (or their representatives), and they are equipped with technical and administrative bodies to manage the service contract 26. The Ambit Authority is responsible for the planning of the service, including the definition of the investment programme, through the drafting of the so-called Ambit Plan 27, with a time horizon appropriate to the duration of the service concession (20 to 30 years). Following the principle of operational and investment cost recovery and the polluter pays principle, the (mean real) tariff of the integrated water service 28, which is billed 29 and collected 30 by the service providers, is also determined by the AOTA in the Ambit Plan. Aqueducts, sewers, sewage treatment plants and all other infrastructure of the IWS are publicly owned and are State property 31. Service provision in the whole OTA territory is entrusted to a service company, by means of the form chosen by the Ambit Authority among the following three options 32 : i) a company exclusively and directly owned by the 20 Galli Law has been replaced, with minor changes, by the Title II of the Section III of the Part III of the Legislative Decree 3 April 2006 No. 152 "Regulations on the environment". 21 Art. 141, par. 2 of the Legislative Decree no 152/ As originally established by art. 8 par. 1 of the Law no 36/1994 (the so-called Galli Law) and reaffirmed by art. 147 par. 1 of the Legislative Decree no 152/ Based on a recent decision by the Constitutional Court, the State is in any case ultimately responsible for public services and therefore it must replace the OTAs in the event that municipalities, for whatever reason, fail in their duty. 24 This, together with the principle that water is publicly owned, was established, reaffirming principles already contained in previous legislation on water, by Art. 1 of Galli Law, redrawn with some changes in Art. 144 of the Legislative Decree no 152/2006, which states: "1. All surface water and groundwater, although not extracted from the subsoil, belongs to the State. 2. Water is a resource that must be protected and used in accordance with criteria of solidarity, safeguarding the expectations and the rights of future generations to enjoy an unimpaired environmental wealth. 25 Art. 148 of the Legislative Decree no 152/2006. Recently, Law no 42, 26 th March 2010, repealed the Ambit Authorities, subsequently extended until the end of this year (2011), returning the decision-making power to the Regions. Regions are currently developing legislative proposals in this regard. 26 The relationship and the reciprocal obligations between the Ambit Authorities and the service suppliers are set out in Art. 151 of Legislative Decree no. 152/2006 and are ruled by means of a contract drawn up by the Ambit Authority. 27 Art. 149 of the Legislative Decree no 152/ Art. 154 of the Legislative Decree no 152/ See footnote above. 30 Art. 156 of the Legislative Decree no 152/ Art. 143, par. 1, of the Legislative Decree no 152/ Art. 150 of the Legislative Decree no 152/

19 municipalities or other local bodies of the OTA (the so-called in-house company), ii) a company partially owned (majority or minority) by the above mentioned local bodies (a form of PPP), where the private partner must be chosen through public tender, iii) a fully private company, to be chosen by public tender. Among the 92 Italians OTAs, only 69 have entrusted the IWS. There are 114 service companies 33, distributed as follows: companies owned by the municipalities (in house): 57; partially publicly owned companies (PPP): 32; fully private owned companies: 7; and companies of non-specified kind: The Italian regions implemented the national legislation between the 1995 and 2000 and the constitution of the OTAs is realized in different ways. In some regions there is just one OTA which covers the whole region 35 ; in other regions the OTAs are mixed: they cover only parts of provinces 36 or in some cases they cover interprovincial territories 37. Finally, in some other regions the OTAs cover provinces 38, and the region of Sicily is one of them. After the implementation of the Galli Law, the integrated water system in Sicily is structured as follows: Nine OTAs are in place: they coincide with the boundaries of Sicilian provinces and are respectively controlled by the Province and the municipalities 39. A so called over-ambit service sector has been established: a new company 40 that, under a long-term concession contract, is entrusted by the Region with operating, maintaining and implementing investment in large aqueducts, supplying bulk water to more than one OTA. A Regional Agency - Regional Agency for Waste and Water services 41 - entrusted with controlling and coordinating the entire water service in the region, later abolished from January 1 st 2010 and replaced (with the same responsibilities) by the Regional Department of water and of wastes (Dipartimento regionale dell acqua e dei rifiuti) 42, one of the branches of the Regional Department of Energy and of Public Utilities (Assessorato regionale dell energia e dei servizi di pubblica utilità) As also stated by regional laws, the opportunity to entrust with more than one service concession was allowed in some OTAs. 34 Co.N.Vi.R.I., 2010, Relazione annuale al Parlamento sullo stato dei servizi idrici Anno 2009, Rome. 35 This is the case in small regions like Val D Aosta, Molise and Basilicata, but also in larger regions like Puglia and Sardegna. 36 This is the case in Piemonte, Friuli Venezia Giulia, Veneto, Umbria, Marche and Abruzzo. 37 This is the case in Toscana, Lazio and Campania. 38 This is the case in Lombardy (with the exception of the metropolitan area of Milan), Liguria, Emilia Romagna, Calabria and Sicily. 39 Source: Sogesid S.p.a. 40 The Sicilian company is called Siciliacque S.p.A., was constituted in 2004 and took over EAS (Ente Acquedotti Siciliani), the previous Regional public body entrusted with managing the large aqueducts in the whole region. It is controlled by private companies, selected by tender, which hold 75% of the shares, and by the Region of Sicily which holds 25% of the shares. 41 The Agency is called Agenzia Regionale Rifiuti e Acque, it is constituted and regulated by article 7 of the regional law of 22 nd December The Agency has taken over from the previous structure of the Commissioner for the water emergency in Sicily. 42 Site : aedeirifiuti. 43 Site: 13

20 Box 1.1 ITALIAN LEGAL FRAMEWORK FOR WATER SECTOR With a body of legislation developed since 1994 there has been an attempt to overcome the previous fragmentation and to rationalise the regulation of the water sector. In what follows, the main cornerstones of the legislative framework are briefly presented. - Directive 2000/60/EC of the European Parliament and of the Council establishing a framework for the Community action in the field of water policy. - Council Directive 98/83/EC of 3 November 1998 on the quality of water intended for human consumption. - Council Directive 91/271/EEC of 21 May 1991 concerning urban wastewater treatment. - Royal Decree of December 11, 1933, No 1775, Approval of the consolidated laws on water and on electrical systems 44, which still regulates the use of surface and groundwater (all publicly owned) through the so-called concessions of public water. - Legislative Decree 3 April 2006, No 152, regulates the environmental sector 45. The law transposes Directive 2000/60/EC into Italian legislation, but also reformulates provisions already contained in previous laws such as, among others, the Merli law 46 on the governance and the protection of water bodies, law 183/89 47 on soil defence and the "Galli" law 48 on water services. The third section of Part III deals with the management of water resources and of the so-called integrated water service. Regional laws, subsequently enacted to implement the provisions of the above-mentioned law in the regional areas, have established the rules regarding key points of the institutional framework of the integrated water services, such as the delimitation of the optimal territorial ambits, the forms and the rules of cooperation between local authorities, the guidance and coordination of the institutional actors in the field of water resources, etc. - Decree of the Minister of Public Works , Normalised Method to define the cost components and to determine the reference tariff 49. This decree sets the criteria and the conditions which the ambit Authority must follow in calculating the reference average real tariff of the integrated water service in each optimal territorial ambit. The outcome of a recent referendum in Italy has actually abolished the tariff component linked to the return on capital invested by the water services firms. - Legislative Decree 2 February 2001, No 31, Implementation of Directive 98/83/EC on the quality of water intended for human consumption 50. Source: Authors 1.3 STRUCTURAL FEATURES AND SERVICE DELIVERED At present, drinking water in Palermo and the surrounding municipalities is supplied both from surface and groundwater sources. These include 51 four weirs 52, four reservoirs 53, four spring groups 54 and twenty-nine wells, the last of these sited in the foothills of the mountains that surround the Conca d'oro and in the hills of Bagheria, a town East of Palermo. 44 Regio Decreto 11 December 1933 n. 1775, Approvazione del Testo Unico delle disposizioni di legge sulle acque e impianti elettrici. 45 Decreto legislativo 3 aprile 2006, n Norme in materia ambientale 46 Legge 10 maggio 1976, n. 319, Norme per la tutela delle acque dall'inquinamento. 47 Legge 18 maggio 1989, n. 183, Norme per il riassetto organizzativo e funzionale della difesa del suolo. 48 Legge 5 gennaio 1994, n. 36. Disposizioni in materia di risorse idriche. 49 Decreto del Ministro dei Lavori Pubblici Metodo Normalizzato per definire le componenti di costo e determinare la tariffa di riferimento. 50 Decreto Legislativo 2 febbraio 2001, n. 31, Attuazione della direttiva 98/83/CE relativa alla qualità delle acque destinate al consumo umano. 51 Source: AMAP web site ( 52 They are: Imera river, Eleuterio river, Santa Caterina on the Oreto river and Madonna del Ponte on the Jato river. 53 They are: Scanzano, Piana degli Albanesi, Poma and Rosamarina. 54 They are: Scillato, Presidiana, Risalaimi and Gabriele. 14

21 Figure 1.3 CHOROGRAPHY OF PALERMO WATER SUPPLY SYSTEM Source: Project Designer The water sources are distributed along a wide strip of territory stretching from Partinico in the West, to Cefalù in the East, over 90 km in length; the aforementioned water sources are mainly located in the East and south-east of the city: only one reservoir and one weir is located on the West side. The water supply system is connected upstream with three municipal and one industrial networks providing water to towns and industrial sites in the surrounding Palermo territory. Before being available to users, surface water is treated in four purifying plants 55 and then, together with the rest of the water, it is collected in storage tanks (nine tanks with a total storage capacity of 247,000 m 3 ) and fed into the distribution network. Water from the sources to the storage tanks is carried by four main water pipes 56 and two recently built systems 57, amounting to an overall length of about 400 km of pipes. 55 With an overall treatment capacity of about 4,700 l/s. 56 Scillato-Presidiana, Scanzano-Risalaimi, Jato and Agro-Palermitano system. 57 Rosamarina-Imera and Rosamarina-Risalaimi. 15

22 Figure 1.4 A SCHEMATIC REPRESENTATION OF PALERMO WATER SUPPLY SYSTEM Raw water taken from surface sources Losses of raw water in the mains Raw water from other water supply systems Raw water to other water supply systems Withdrawal of the natural resource Withdrawal of the natural resource Water taken from groundwater sources Losses of water in the mains Water entering the treatment Losses and water consumption in the treatment of drinking water Output water from the treatment Losses of drinking water in the mains Purifying plants Drinking water from other water supply systems Drinking water to other supply water systems Water entering the storage tanks Overflows from the tanks Storage tanks Losses in the distribution network Losses of drinking water in the internal mains Distribution network Water supplied from the storage tanks Water fed into the distribution networks Apparent losses due to measurement errors Authorised consumption Unauthorised consumption Metered consumption Apparent losses due to billing errors (unbilled metered Billed consumption consumption) Unbilled consumption Unmetered consumption Users Spring Well or well field Weir Source: Authors Reservoir 16

23 In the downstream system, once collected in the tanks, water is delivered to residential and industrial users. The municipal distribution network (about 900 km in length), branches out from the south-east to the north-west part of the city. About 50% is distributed through welded joint pipes in High Density Polyethylene and it corresponds to the sections restructured during the interventions. The remaining is distributed through the old system consisting of cast iron pipes. In the new sections of the distribution network water is supplied according to the concept of water districts, meaning that the network is divided into functionally independent sub-networks. The system ensures the provision of drinking water in the whole territory of Palermo municipality, covering a total area of km 2. Water is collected in the south-eastern part and then delivered through the city by the distribution network. In order to ensure a more balanced distribution of water between the Eastern and Western part of the city, an external bypass, known as Pedemontana pipe, is used, built with the interventions under assessment, which does not interfere with the internal distribution network (crossing the city) and is located in the highest part of Palermo (over 70 metres above sea level). It consists of a main pipe which connects a chain of storage tanks where water is collected in order to be fed into the sub-networks supplying water to inhabitants living in the city. Box 1.2 AMAP MANAGEMENT IN THE OTA OF PALERMO The service provided by AMAP S.p.A. is part of the IWS organization of the OTA 1 of Palermo. According to the service agreement stipulated by AMAP with OTA and Acque Potabili Siciliane S.p.A. 58 (APS, supplier of IWS in the remaining municipalities of the OTA 1 of Palermo), AMAP is actually responsible for the operations and the ordinary and extraordinary maintenance of the IWS infrastructures in Palermo area. It is also in charge of the supply, adduction and potabilization infrastructures which supply mostly Palermo 59 but also some other towns along the East and West coast of Palermo 60. The services fees are set by OTA but collected by AMAP, which issues bills to consumers. AMAP annually transfers a share of the proceeds to APS (slightly more than 5 MEuro 61 ), both for private co-financing of planned investments in Palermo and the financial balance between the operating costs of AMAP and the ones covered by APS in order to provide the IWS in the remaining part of the ambit. Through the aforementioned agreement, AMAP and APS are committed to finding ways of organizational implementation of their services with the aim of using in a synergistic way the opportunities offered by their respective skills and expertise, with the goal of reducing total costs of the service. In fact, investments in the infrastructure of the Palermo net, together all the other investment in the OTA, are established in the three-year operational plan (TOP) approved by the AOTA and they are carried out by APS, which also provides the co-financing. In this framework, in the first TOP, investments in the infrastructures managed by AMAP are planned for about 55.3 MEuro, about 13 MEuro of which concerns investments related to the water supply network 62, aiming at further improving the service. These investments have not been carried out yet (see Section 2.2). Source: Authors 58 Approved by the Authority of OTA with the decision C.S. n.1 of : Approval of the service agreement between AOTA 1 Palermo, AMAP. S.p.A. and Acque Potabili Siciliane with attached transitive act. 59 They are external waterworks (or water schemes): Scillato Imera Presidiana; Jato; Scanzano Risalaimi; Piana degli Albanesi Gabriele Oreto; Rosamarina. 60 AMAP also provides a purification service for the effluents from the municipalities of Villabate, Ficarazzi, Misilmeri (Frazione Portella di Mare), Monreale, Altofonte by the sewage treatment plant of Acqua dei Corsari. 61 net of payment of instalments of the previous loans 62 They are the following interventions: Sub-network Sferracavallo (~3.4 M ); Part of the completion of the sub-network Villagrazia Alta e Bassa (~4.0 M ); Rationalization of the connections of the new tanks to the concerned sub-networks (~2.7 M ); Development of the supplying to the new sub-networks (~2.9 M ); Maintenance n 13 tanks (~0.2 M ). 17

24 Water collection and distribution in Palermo is responsibility of AMAP S.p.A. (Azienda Municipalizzata Acquedotto di Palermo, Municipal Company Aqueduct of Palermo) 63. Originally, it was entrusted only with the provision of drinking water service but in 1994, it became responsible for the management of the entire water cycle (the so-called Integrated Water Service-IWS) partly as a result of the reforms introduced by the National Law n.36/ The interventions occurred in the period were promoted by AMAP as part of a wider programme of modernisation and improvement of the water supply system in Palermo, which long suffered from water loss problems. However, although part of a larger strategy of interventions, the project assessed can be considered as a stand-alone unit of analysis since the remaining components were either not realised (in particular those related to the distribution network) or were not functionally related to it (for example some components related to the adduction and external network). 1.4 CURRENT PERFORMANCE In 2010, water abstraction from surface and groundwater sources amounts to a total volume of 125,829,126 m 3, of which 68.7% is to supply drinking water to Palermo Municipality. In the same year, 120,000 users 65 received water from the system. Among those users more than 60% were supplied by the part of network (six sub-networks) rebuilt as part of the project under analysis. At present, a continuous service provision is ensured to 75% of users, while the remainder particularly those living in the Southern part of the city and in the Northern suburb of Sferracavallo are still subject to supply disruptions. As it will be further discussed below, the state of decay of some sub-networks is so great that maintaining them in operation for 24 hours would lead to a further worsening of the service delivered, with the percentage of water losses and breakages in the pipelines increasing. The current situation in terms of water availability is however quite good compared to the situation in 1997, where continuity of service was guaranteed only in two areas of the city (see Figure below). However, even in the areas where water is regularly supplied, water pressure is not always adequate. This is why some of the users still use their storage tanks and electric pumps to raise water pressure. Moreover, even in one of the new sub-networks, water pressure is still sometimes not optimal, due to the inadequacy of the feeding system. 63 AMAP was set up by Palermo Municipality in 1947 (Municipal decision dated on 15 March 1947). Later, in 1999, AMAP changed its legal structure (Municipal decision n 131, dated on 13 May 1999) and became a special agency. Two years later (in 2001), the company became a limited company, fully owned by the Municipality of Palermo. 64 See the previous paragraph 65 1 user corresponds to about 6 inhabitants 18

25 Figure 1.5 THE WATER SERVICE PROVISION IN 1997 AND 2011 Source: AMAP Areas with a continuous service provision From the users point of view, water service provision in Palermo is good. Results from the survey of customer satisfaction, carried out by AMAP in 2010, confirm that users are satisfied with the continuity of the service provision and the quality of water delivered 66. The system is currently suffering from a severe problem of water losses. About 47.8% of the water fed into the distribution network in 2010 (86,406,847 m 3 ) was lost 67. This is not surprising considering that over the last thirteen years (from 1997 to 2010), the gap between the volume of water fed into distribution network and that billed by AMAP has been on average about 46.22%. The water losses ranged from a maximum of 48.7% in 2006 to a minimum of 39.3% in 2002 respectively, corresponding to the highest and lowest volume of water fed into the distribution network. The issue of water losses in Palermo is not straightforward. Both real and apparent water losses 68 are recorded and they can be explained by referring to four kinds of problems currently affecting the water service provision in Palermo. The first problem concerns the distribution network. Some sub-networks, specifically those supplying water to the Southern part of the city, are deteriorated by time and corrosion and are thus subject to continuous breaks. They are made up of cast iron pipes, dating back to the end of the Second World War. The user connections to these sub-networks are obsolete and experience breakages as well. As a consequence, a share of water pumped into the pipes gets 66 On a scale from 1 (not satisfied) to 4 (very satisfied), users declared themselves to be fairly satisfied with the continuity of service provision (3.1) and with the quality of water (3.7). Source: AMAP (2010), Survey of Customer Satisfaction on the services delivered by AMAP, carried out by STAT consulting s.r.l. 67 This is the difference between the water fed into the system and the water sold by AMAP (in 2010 amounting to 45,113,511 m 3 ). 68 Real losses are the physical losses (or leakage) due to pipe breakages. Apparent losses are caused by revenue meter underregistration, water theft and billing errors. 19

26 lost along its journey to the users. To deal with this issue, some repair interventions have been planned by AMAP for the worst sub-networks 69 and investments were undertaken to replace older user connections with new ones. Figure 1.6 WATER BALANCE IN PALERMO OVER THE YEARS 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000, volume of water fed into the system volume of water billed Source: Authors The second problem is related to the water meters currently used in Palermo, which in some cases are not able to register the exact amount of water consumed by users, through being too old and characterised by a low degree of sensitivity 70. The main consequence is that users do not pay for the exact amount of water they consume, causing a loss of revenue for AMAP. In collaboration with the University of Palermo, AMAP has recently started to study the measuring systems with the aim of reducing the economic effects of their inaccuracies (see Section 4 for further details). Results of this study show that water meter accuracy is influenced by the age and extent of wear of the meter, and by the presence of storage tanks (see Box 6 for details). As a consequence of these findings, water meters older than ten years are being replaced. During the last five years, more than 58,000 water meters have been replaced by AMAP. 69 Two projects have been drafted for rebuilding two sub-networks (Boccadifalco and Villagrazia) which are located in the higher part of the city (over 70 meter above the sea level), see Section Water meters in Palermo are mainly of a multi-jet type with a measuring capacity of 15 l/h, meaning that if the volume of water flows at a lower quantity than 15 l/h it is not registered and not charged to users. 20

27 Box 1.3 HOW DOES THE WATER METER WORK? Meters are instruments for charging customers for the water they use. There are several ways water meters can be classified but meters encountered in water distribution systems either operate based on principles of positive displacement or the velocity of flowing water. Positive Displacement Meters (PD meter) rely on all water flowing through the meter to "push" the measuring element (generally there is a piston or disk moving a magnet that drives the register). PD meters are sensitive to low flow rates and accurate over a fairly wide range of flows. There are typically two types of positive displacement meters used in the drinking water industry, nutating disk and piston meters. These types of meters are used in homes, small businesses, hotels and apartment complexes. They are available for pipe sizes from 5/8 inch to 2 inches. Velocity-based designs include single- and multi-jet meters and turbine meters. They operate based on measuring the velocity of flowing water through a known cross-sectional area to obtain a flow rate. The volume of water passing through the meter can then be calculated by multiplying the flow rate by the period of time being considered. While, multi-jet meters are very accurate in small sizes and are commonly used in 5/8 inch to 2 inches sizes for residential and smaller commercial uses, turbine meters are generally available for 1.5 inch to 12 inch or higher pipe sizes and for large commercial users, fire protection, and as master meters for the water distribution system. Source: Authors Although water meter accuracy error is a significant component of the apparent losses of the water supply system in Palermo, a share of these is also due to water theft, i.e. unauthorised user connections. This phenomenon is more widespread in but not confined to - the areas of the city characterised by security problems. In some extreme cases it was reported that the water service is directly provided by organised crime, which also collects water tariffs for it (see Box below). Drinking water is regularly supplied in the area of ZEN 2 and the inhabitants pay a monthly amount for the water consumed (ranging from 10 to 30 Euro), depending on family size, and receive a receipt in return. The responsibility for the collection of the tariff is not with AMAP but with an unknown person who has the key of the tank where the water is collected before being delivered to the families. About one year ago, the Independent Institute of Council Houses in Palermo invited 180 families to legalize their water consumption. Today, only 11 families have replied. A further plea has been made on September. If the families do not reply in time, they will be forced to move out of their houses. Source: La Repubblica, September 23, 2011 Finally, water service provision in Palermo is affected by the problem of users in arrears with the bill payments. In order to force these users to pay for the water they have consumed, a taskforce was set up by AMAP about one year ago. The users in arrears have 40 days from the receipt of the communication to fulfil it, otherwise the water delivery will be discontinued. At the beginning of 2011, only 65% of users in arrears cleared these arrears, while about 2,000 users are still in debt. Although deprived of the use of water by AMAP, these latter customers have availed of unauthorised connections to the distribution network 71. The issue of unpaid bills is not related to an affordability problem, as highlighted in a Court of Auditor report 72. Currently, the water tariff in Palermo 73 amounts to 0.77 /m 3 for an average 71 Source: La Repubblica, March 31, Court of Auditors, 2009, Statement of preliminary findings, performance audit of ERDF co-financed investment in Sicilia s public water supply (Italy), Audit visit of 29 June 2009, 9 July As far as the only water distribution service is concerned. 21

28 consumption of 120 m3 per year, which represents an annual expenditure of Euro per year per household, corresponding to 0.26% of the yearly household income International literature indicates thresholds for public utilities affordability (as a percentage of total income or expenditure) ranging from 2.5 to 5%. See: OECD (2003) Social Issues in the Provision and Pricing of Water Services, OECD, Paris. 22

29 2 ORIGIN AND HISTORY 2.1 BACKGROUND The water distribution system in Palermo dates back to the second half of the Nineteenth Century, when the troops coming back from the Crimean War brought with them a very dangerous strain of cholera, which fatally affected a high percentage of the population. The need to guarantee a safe water provision system made it clear that the existing system did not ensure the necessary conditions for healthy water provision 75. Spurred by the urgency of the situation, the Municipality of Palermo had to build a modern and efficient system able to provide the inhabitants with water of a higher quality. Box 2.1 FROM THE WATER TOWERS TO SCILLATO WATERWORKS Until 1885 the water service in Palermo was provided via water towers, an old system dating back to the period of Arab rule in Sicily. Water towers were high permanent squared structures, which were originally placed on the city walls. Later, following the expansion of the city, they were also built in the city squares. Under this system the water taken from different sources was piped by means of clay pipes (called incatusati ) in large tanks (called Ricettacolo Magistrale ). Through coneshaped pipes (called catusi ), water was carried up to the top of the water towers and then collected in vessels (known as urne ). From there, it was piped to secondary towers built on the walls of houses and finally delivered to the users by means of cone-shaped pipes. Users usually collected water in bowls, called Giarre, which were built of clay or zinc. About thirty water towers, and ascending and descending pipes on the outer walls of buildings, are still visible today in Palermo. This system did not ensure high quality water supply. Given the joints and the material they were composed of, the clay pipes easily allowed plant roots to penetrate inside and contaminate the water. In addition, water could be contaminated by cesspits (collecting wastewater), which were located close to the pipes. These problems were taken into account during the construction of Scillato waterworks. The wastewater flow was moved away from the water supply system and the pipes were built of cast iron and no larger than 300 mm in diameter. Source: Authors It was therefore decided to build waterworks to bring water from the Scillato spring (located in the Southern part of Palermo and originating in Madonie, a major mountain group in Sicily) to the city. The construction company was identified through a public call for tenders procedure including a scheme of project financing. The winning company won the concession of water service delivery for thirty years. This company was the Società Acqua di Scillato (Scillato Water 75 The issue of supplying abundant and healthy water was long worrying Palermo Municipality, but a solution was demanded following the cholera episode ( ) and scientific findings which declared bad water as the vehicle for contagious diseases Di Piazza, M. (2008), Palermo, città d acqua. Aspetti storici e naturalistici dell acquedotto, AMAP s.p.a. 23

30 Company) owned by the Brothers Biglia and Vanni 76. The works included waterworks (about 70 km in length), two reservoirs (located in the south-eastern part of the city and with an overall capacity of 36,500 m 3 ) and a piped network in cast-iron, 80km long (see Figure 2.1 a). Some difficulties were faced during the realisation phase, especially due to the lack of adequate means of transport and excavation (material was carried to the mountains by donkeys and excavations were made by hand). However all the obstacles were overcome and in three years the waterworks were completed: in August 1896, Scillato waterworks were completed and water provided to houses. It was welcomed as a work of great value. Scillato waterworks are a work of art, which is a credit to Italy and the envy of other countries. The description presented in this document, although detailed and aimed at emphasising it and describing the difficulties encountered, should admit that those responsible for its construction became aware of these difficulties and were able to overcome them. Source: Relation on the testing of Scillato waterworks, quoted during an interview In the following years, the development of the water supply network followed the expansion of the city north-westwards. The system worked well until the end of World War II, when a series of events led to critical conditions in the provision of the service. First, the city of Palermo was bombed and the entire infrastructural system was damaged. Then, when Sicily became an autonomous Region with a special statute and Palermo its capital, the population in Palermo started to rapidly increase (thanks to a high rate of immigration), and the expansion of the city followed. The water distribution system, although repaired after the damage caused by the war, was not able to meet the increasing water demand. The operating company went bankrupt and the Palermo Municipality set up a municipal company to operate the service. In 1952, an ad-hoc Commission identified a number of urgently needed interventions to provide additional water resources and huge investments were undertaken by the Cassa del Mezzogiorno 77 to exploit new water sources 78. In order to address the systematic water shortages, an increasing quantity of water was provided to the system 79 but this did not solve the problem. Another option was to influence the level of water consumption; therefore it was also decided to revise and increase the tariff, keeping a low tariff for low water consumption and making additional consumption more expensive 80. However, the expected results were still not achieved. 76 In 1886 a British company was awarded the competition launched by Palermo municipality but, for reasons still unknown, they did not start the works. Seven years later (12 th February 1893), the Municipality entrusted the Biglia Brothers and Alessandro Vanni with the construction of the Scillato waterworks. 77 A public development agency founded in 1950 to promote industrial development in Southern Italy, with the aim of bridging the gap with the Northern Regions. It ceased operations in In the period between the end of the 1960s and the beginning of the 1980s the following interventions occurred: the building of Scanzano-Risalaimi waterworks (completed in 1968), Jato waterworks ( ), and the new Scillato waterworks (beginning of 1980s). 79 The Scanzano dam and a purifying system were built at the end of the 1960s providing 1,000 l/s to the city. After ten years another dam and a purifying system were added in Parsimico. Additionally, wells were sunk to provide further water to the system. 80 The highest rate was 2000 Lire/m 3, slightly more than 1 Euro/ m 3. 24

31 Figure 2.1 PALERMO WATER SUPPLY S HISTORICAL DEVELOPMENT a) end End of 19th century b) 30 years 30 years Altarello Tank S. Ciro Tanks Gabriele Springs S. Ciro Springs Scillato Acqueduct c) d) years years years Jato Acqueduct Petrazzi Tank Gabriele Purifying plant Scanzano Acqueduct Source: Authors elaboration of AMAP maps 2.2 FINANCING DECISION The approach to water management started to change when at the end of 1970s AMAP commissioned an expert study 81 to understand how the problem of water resources scarcity could be overcome. By analysing the historic data of water provided to the system and the water invoiced, the experts realised that the additional water provided over the years did not 81 AMAP, (1978) Progetto di dimensionamento e verifica idraulica della rete di distribuzione della città di Palermo. 25

32 actually translate into higher water consumption. In contrast to common perception, the study results pointed to the existence of a high incidence of leakages as the main source of scarcity, and recommended the repair of the distribution network as the only viable solution. Providing more water to the system was ineffective given the poor state of the distribution network. Another phenomenon occurred in the late Eighties: the water searchers. And this is not meant in a metaphorical way. The citizens of Palermo, exhausted by the dry spell, really used to look for water. How? By digging wells everywhere. Sometimes with the help of water diviners. That was a widespread phenomenon, people digging wells everywhere, even within apartment buildings or basements. Source: Giuliana Saladino, quoted by Gabriello Montemagno in Repubblica.it, 23 July Together with the state of the infrastructural asset, however, poor managerial capacity in AMAP as well as weak political commitment to solve deeply rooted problems in the water supply system were the main cause of water shortages. Historically, water provision and distribution in Palermo was affected by serious problems of mismanagement and was exposed to the influence of organised crime. During 1989 and 1991 in Sicily there were very little rain and severe droughts affected the Region. The agriculture sector was seriously affected and water was supplied to the population with disruptions of three days or more. Inhabitants were forced to take water from tanks located in the main squares of the city and the scarcity of water and uneasiness created among the inhabitants was high. In a break with the past, at the beginning of the 1990s Palermo experienced a period of indepth political and cultural renovation. At that time the municipal authority committed strongly to fighting organised crime and corruption and promoted transparency and accountability in public management and tendering of public works. In this new political and institutional context a newly appointed board at AMAP promoted a completely different approach to the problem of water shortages. A staff of engineers was charged with drafting a Master Plan for the new water distribution network in Palermo (hereafter the Master Plan), which was developed taking the design concept of the study carried out by AMAP years previously, identifying water losses as the key problem of the water supply system. Box 2.2 WATER SUPPLY AND ORGANISED CRIME The involvement of organised crime in the water sector in Sicily dates back a couple of centuries. Before water regulation was in place, water distribution in the countryside of Palermo was under private control. Land tenants sold water to fountain-keepers (the so-called fontaniere ) who provided the water to users. The fountain-keepers and the tenants were often strictly linked to the mafia organization, and the control of the water sector caused conflicts that were at the origin of the first mafia wars 82. Water was an essential resource for the cultivation of citrus fruits which were exported to the national and international markets, especially to the United States. In this way, control of the water sector and of the 82 In this regard the article wrote by Umberto Santino, L acqua rubata (The water that has been stolen), and published by the Sicilian Center of Documentation: Giuseppe Impastato, in 2006, reports a series of murders by the mafia-related to the control of water distribution: in 1874, the plumber Felice Marchese was killed in Monreale, a towns very close to Palermo. The murder was the consequence of a conflict between two different mafia organizations: the Giardinieri and the Stoppaglieri. This was the first documented mafia war. In 1890, Baldassarre La Mantia, the guardian of the water of the psychiatric Institution of Palermo, was also killed. He refused to favor the tenants Vitale, who were the bosses of the Alterello di Baida section of Palermo, Also in 1945, the secretary of the trade union offices, Agostino D Alessandro was killed because he fought against the power of the mafia in the water service. 26

33 citrus sector was in the hand of organized crime 83. In more recent times, the mafia has also maintained control within the newly established irrigation consortiums. The most important case is the one regarding the consortium of the High and Medium Belice. It was instituted in 1933, during the fascist era, and occupied a district of 106,000 hectares for the realization of a dam on the river Belice, in the south-west of Sicily. The consortium remained nonoperational until 1944 because of the opposition of the mafia which was afraid of losing its monopolistic power over the water sector. 84 In the 1960 s Palermo started suffering serious water supply problems. According to the urban planning regulations, produced by the Ministry of Public Works in 1968, only 13 wells were being used as public water sources. Two of them were salty and the others were very poor in quality. However, since the beginning of the 1990s an additional 114 springs and 600 wells were being used by private companies (many of them under mafia control) to abstract water directly from the water table, which was becoming more and more depleted. All the wells in the territory should have been publicly owned but, they were in fact, controlled privately, so that even the municipal company, AMAP, used to buy water from private wells, at a cost of approximately 800 million Lire per year. In 1956 management of the water service delivery of Palermo changed from the private to the public sector. New managers of AMAP were nominated, reflecting political interests. The person in charge of managing the changeover on behalf of the public authority was Vito Ciancimino 85. He decided the recruitment strategy and control systems, and maintained strict control within the AMAP company. In 1977 his cousin became the president of the company. This was the beginning of a series of public contracts awarded by AMAP and the Municipality of Palermo to companies under the influence of organized crime 86. In particular, AMAP granted some tenders to a company linked to Ciancimino 87. The company was in charge of maintaining and restructuring the water network of some Palermo districts. In 1990, Vito Ciancimino was definitively indicted and arrested together with his business partner, the manager of AMAP in the period and the manager of the aqueduct 88. Source: Authors The original design was an ambitious and innovative plan to completely restructure the water supply system and replace the distribution network. As far as water resources were concerned, the Plan included interventions to acquire new water resources (such as private wells) and ensure the full exploitation of existing ones; interventions of extraordinary maintenance and improvement of the oldest purifying plants and pumping systems. With regard to the distribution network, the Plan included interventions for replacing the oldest part of the network, ensuring a balanced distribution between the Eastern and western areas of the city and measuring the key parameters of water distribution (such as pressure, rate of flow and quality). The building blocks of the project design were the following: In order to rationalise the distribution system, the Palermo territory was divided into three altimetrical layers 89 above sea level. In order to have more flexibility in water 83 It seems that this is the way in which they started to come in contact with emigrants in United States and some of them became the founders of the mafia organization in the US. 84 Umberto Santino, L acqua rubata (The water that has been stolen), the Sicilian Center of Documentation: Giuseppe Impastato, Vito Alfio Ciancimino ( ) was a politician belonging to the Christian Democrat party. He was in charge of managing public works in the municipality of Palermo from 1959 to In 1970 he became the mayor of the city. In 1993 he was convicted of mafia association and corruption. 86 Gabriello Montemagno, Spreco e mafia, l affare acqua, Repubblica.it, 23 July He was the second sleeping partner of the company, with Romolo Vaselli being the single official owner. The same company was awarded several times the tenders for the provision of waste collection and street cleaning. 88 Saverio Lodato, Manette per Vito Ciancimino (Ciancimino in handcuffs), L Unità, 6 June From 0 to 35 metres above sea level (the most populated area), from 35 to 70 metres above sea level and more than 70 metres, corresponding to the mountainous, less populated area of the city. 27

34 distribution, each layer was subdivided into water districts or sub-networks (ranging from a minimum of 4,000 to a maximum of 165,100 habitants). A total of 17 sub-networks are currently in operation. The main result of this zoning process is that each sub-network operates as a stand-alone unit by supplying water to users independently of the others, in contrast to the past when the entire city was served by a unique undivided system. In order to facilitate water distribution from the south-eastern part of the city where it originated to the western part where the city mainly developed, a pipe bypassing the city (the Pedemontana ) and provided with large tanks 90 to supply water was designed. Lastly, in order to better supply the entire system, the experts designed the construction of an underground gallery (similar to the London ring ) to be built under the identified sub-networks and aimed at providing them with water through a system of wells. This was the most expensive and controversial component of the entire design. This plan cost about 800 billion Lire 91, the most expensive component being the underground gallery for water supply (about 600 billion Lire). The plan was approved by the R.A.T.C (Regional Administrative Technical Committee) 92 on 29 September 1990 (Resolution n.17982) but it was not immediately implemented. A new management board of AMAP was appointed in The selection criteria of its members were strictly related to merit and professional capacity. At the beginning of its activity the new AMAP board prepared a long-term development plan aimed at supporting company development in the following years. The plan identified the level of service provision to be achieved and the necessary organisational and managerial strategies AMAP should implement, stemming from the requirements of the new legislative framework embedded in the national water reform. This development plan, drawing from the need to enhance service quality, was design to transform the company into a modern utility company. The most important event for the company, which should materialise in the first months of 1999, is the transformation of the Municipal Company into a Special Company with a subsequent reorganisation of the entire structure, with the objective of achieving more efficiency and effectiveness as well as an improvement in the quality level of the service provided to citizens. Source: Piano Programma, AMAP, The development plan prepared by the new board confirmed that short term investment priorities had to address the improvement of the water distribution system rather than increasing the water quantity in the entire system. On the basis of more realistic and updated 90 Some of them to be built in caverns. 91 More than 400 MEuro in nominal prices at In Italian it is the C.T.A.R (Comitato tecnico amministrativo regionale). It was the authority in charge of providing technical judgement on the public works to be realised in Sicily between years. 28

35 demand forecasts, assuming a steady rather than increasing population trend, this plan pointed to the need to redesign and adjust the capacity of the planned investments. The push to the realisation of the investments under analysis came in 1994, when the Ministry of Public Works 93 made available resources from the Community Strategic Framework Objective 1 Enlargement and Adjustment of water supply and distribution infrastructures, which however did not allow for the realisation of the entire Plan. After a long querelle about the suitability of and need for the underground gallery, the new board of AMAP 94 decided not to undertake that component, and focus instead on the elements related to the distribution network. The timeframe for the project application did not allow for a complete redesign of the original plan. Therefore, taking a pragmatic approach, three lots of the original plan - concerning three sub-networks for which the executive projects were ready - were submitted to the Ministry of Public Works. The projects were approved on 15 th November and entirely financed with public funds (50% from EU grants and 50% from national resources 96 ). The beneficiary of the funding was the Municipality of Palermo, which entrusted AMAP with the responsibility for project implementation. Following this first phase, the board of AMAP prepared five additional projects (taken from the Master Plan) and submitted them to the Ministry of Public Works for approval. Discussion between the European Commission, Ministry of Public Works and the Municipality of Palermo led to the decision that the projects were worth financing but asked for financial contribution from AMAP. Therefore AMAP applied to the European Investment Bank (EIB) for a loan of about EUR 23 million. The EIB played a key role in the history of the project: in order to better understand the rationale of the project and the needs it was designed to meet, it appointed an independent evaluator to carry out a field mission in Palermo. The results of this exercise pointed out that the water metering system in Palermo needed also to be improved and the EIB conditioned the loan decision on the implementation of a system of automatic metering, providing to this end an additional loan of EUR 13 million 97. The implemented project consisted of eight components, starting in 1997 and completed in Specifically, it includes: The completion of the Pedemontana pipe: this concerns the completion of the external bypass, to provide water from the Eastern part to the western part of the city. The works include the building of five tanks with an overall capacity of 60,000 m 3 and their connections to the sub-networks. Rebuilding of six sub-networks: this concerns the replacement of six sub-networks (about 450 km of pipe, representing 50%, of the distribution network), mainly located 93 Now the Ministry of Infrastructure and Transport. 94 The new board took office in June Ministry of Public Works, Decrees n.1, 2 and 3 on 15 November National Funds were resources made available by C.I.P.E (Inter-Ministerial Committee for Economic Planning), the authority in charge of economic planning in Italy on behalf of the Ministry of Budget and Ministry of Treasury. 97 The loan was provided in five instalments between 2001 and 2008 and it is expected to be paid off by AMAP by However, not all the instalments were actually used for the interventions under assessment. Thanks to cost savings some of these funds were used for additional investments, such as new user connections. 29

36 in the high densely populated area of Palermo (60% of population). These represented the oldest parts of the distribution network, dating back to the Nineteenth Century and experiencing the highest percentage of water losses. The leakages were mainly located at the mechanical joints (more than 200,000) of the old cast iron pipes which had decayed through time and corrosion. The supervision and remote control system: this concerns the provision of a monitoring system to check some fundamental parameters related to water distribution such as pressure, flow rate and quality of the water. It consists of the realisation of a Monitoring Centre inside the building of AMAP and 74 stations working at the crucial points of the distribution network. The project financing decision was approved on March and works immediately started. The project forecast total cost was EUR million, of which 40% (EUR 46.9 million) was expected to be provided by the EU, 40% by national public funds and 20% by the Municipality of Palermo (but ultimately by AMAP) through the EIB loan. 2.3 PROJECT IMPLEMENTATION AND ADDITIONAL INVESTMENT NEEDS The Ministry of Public Works was in charge of managing the funds and strictly supervised the whole construction works. A statistical analysis of the unit costs of water infrastructures 99 prepared by the Ministry of Public works states that, while the average cost of water infrastructure per inhabitant on a sample of Italian projects financed in the same period was 272,547 Lire 100, costs for the Palermo sub-networks ranged from 155,577 to 353,620 Lire, with an average cost (ex-post) of 237,754 Lire. Among the cost items, the most expensive elements related to excavation and street works 101 as well as the environmental cost of discharging the processed materials, while only 22-23% was related to the cost of pipes. Notwithstanding that, the material (high density polyethylene, HDPE) and processes used for the pipes were quite advanced, with a high level quality control system. A leading international company 102 certified the quality of all the pipes and equipment. Although the materials were supplied from abroad 103, Italian companies were contractors on the works. At that time, it was one of the first experimental attempts to use polyethylene pipes on such a large-scale water project. 98 Ministry of Public Works, Decrees n. 62,63,64,65 approving the financing for three sub-nets and the supervision and control system; Decrees n. 88 approving the financing for the completion of Pedemontana pipes. 99 Ministry of Infrastructures, General Directorate for the Networks, Proposta di un metodo di analisi statistica dei costi delle opere idriche, QCS PON ATAS : Quaderno tecnico N Equal to Euro. 101 It is worth noting, for example, that streets in the historical centre were paved with marble blocks (most of them of the valuable Billiemi marble stone) which had to be numbered one by one and put back in the same position after excavation. 102 Bureau Veritas, see For example, Solvey provided the raw material to build the pipes. 30

37 The investment timing was in line with the forecasts (only 18 months delay due in particular with the discontinuation of one of the contracts) and costs savings were recorded 104. The actual project costs were lower than expected: EUR 88 million, corresponding to a cost saving of more than 20%. Reasons for the differences were that adjustments were made from the preliminary to the definitive and executive design and discounts were offered during the tendering phase. On top of that it is worth mentioning that during implementation no technical or other operational problems were encountered and several precautions minimised the impact on traffic and other urban functions. After 2003, although further interventions were planned by AMAP to improve both the distribution network and the adduction system, only limited additional investments were made, none of them on foot of the Master Plan design. The original plan of a full restructuring of the entire water supply system and to significantly upgrade the internal technical and managerial capacity of the AMAP was then discontinued. As far as the distribution network is concerned, spurred in by the improvement in the metering system implemented as part of the interventions under assessment, AMAP continued replacing old connections to the network and improving the metering systems. With regard to the adduction system, the following interventions have been realised: The building of a linking pipe between the Rosamarina reservoir and the purifying plant Risalaimi. The intervention was carried out in 2002 and included the building of a pipe, about 15 km long with a diameter of 900 mm, and reinforced concrete tanks with an overall capacity of 2,000 m 3. Currently, this pipe is capable of carrying the water withdrawn from the Rosamarina west main (Rosamarina reservoir) to the purifying plant Risalaimi (built in 1967) at a flow rate of 500 l/s 105. After treatment, the water is piped into the tanks located in the Eastern part of Palermo and then fed into the distribution system. The building of a linking pipe between the Rosamarina reservoir and the Imera purifying plant. It consists of the building of a pipe with a diameter of 600 mm and about 15.6 km in length, which allows the conveyance of water taken from the Rosamarina reservoir to the Imera purifying plant (located in the municipality of Scillato) at a flow rate of 400 l/ s. The treated water is then supplied to Palermo. The intervention became operational on September A third intervention has been undertaken but still not completed due to problems in the tendering procedure. This relates to the building of a desalination plant in the industrial area of Termini Imerese for the treatment of water taken from Presidiana 104 A recent Court of Auditors report (see the list of references: Court of Auditors, 2009) points to significant cost overruns experienced by the project. However, it was indicated, and reported in the response from the Italian authorities (Region of Sicily, 2010,), that the actual cost of works was in the end higher than forecasted because additional investments were undertaken and paid for by AMAP. This related in particular to about 100,000 connections to the main pipes that were provided together with other investments. Moreover, the Court of Auditors report was rather misleading on the indication of the total costs, referring to the financing decisions (based on the ex-ante forecasts) rather than on the ex-post recorded costs. 105 The project took advantage of the opportunity offered by the remaining capacity of the purifying plant that had a treatment capacity significantly greater than that the one which was used to treat the water brought to it. 31

38 spring (located in Cefalù). The aim of this intervention was to increase the water flow to l/s; this is currently limited to 140 l/s due to the need to mix it with the Scillato water to reduce the level of sodium chloride to drinkable levels. Among the interventions planned in the rest of the network but never realised are the following: four projects were drafted for the complete replacement of other old sub-networks (Boccadifalco, Villagrazia, Brancaccio and Villa Adriana), in the same vein as the interventions already implemented. Two of these have been approved by the management board of AMAP but not yet realised. as already mentioned, in order to ensure an adequate feed to the sub-networks concerned by the project under analysis, the original Master Plan included the building of a large underground gallery including large pipes and wells aimed at feeding water into the sub-networks at adequate pressure levels. The intervention was discussed at length but never approved by AMAP. a further investment was scheduled to improve the feeder system of the subnetworks. It dealt with the building of a new tank (Pitré), with an overall capacity of 160,000 m 3, to be placed in the middle of the city as a barycentre between the urban distribution network and the Pedemontana pipe. Its construction is still under discussion by AMAP. The reasons for the discontinuation of this broad investment strategy are manifold but mainly relate to governance constraints (with a change in the AMAP board of directors), exacerbated by institutional conflicts in the application of the national reform of the water sector. The issue is extensively discussed in the concluding section as the key determinant of ex-post project performance. 32

39 3 LONG-TERM DEVELOPMENT EFFECTS This section presents the assessment of the long-term effects produced by the project, firstly, by summarising the effects produced under the seven categories 106 identified in the First Interim Report, and then, by discussing the most significant ones, especially in terms of effects on different stakeholders and the levels at which the effects are produced. 3.1 KEY FINDINGS Evidence shows that the water supply project in Palermo produced positive and significant effects mainly in terms of improvement in the quality of life of citizens. In particular, after project implementation a more reliable and secure service provision was ensured for most of the municipal population. This effect is expressed in terms of direct welfare and growth effects, indicated by the reduction in complaints and monetised via the avoided costs of domestic and industrial users due to the improved water service. Growth improvements relate also to the increase in the management efficiency of the municipal company, given the avoided maintenance and operating costs required in the old network. Minor effects are recorded in terms of growth, represented by higher productivity of commercial and industrial users in the city benefitting for better water provision. These effects were however not quantified. In fact, the relationship between the improvement in the reliability of the water service and the increase in the productivity of economic activities is rather loose and difficult to establish from a quantitative point of view. Table 3.1 SUMMARY OF NATURE AND STRENGTH OF IMPACTS Strength* Level 1. Direct welfare and economic growth +4 Local 2. Endogenous dynamics +3 Local 3. Social cohesion 0-4. Environmental effects +1 Local 5. Territorial cohesion 0-6. Institutional quality 0 Local 7. Social happiness +5 Local *-5 = very strong negative effect; 0 = no effect; 5 = very strong positive effect (the criteria considered to assign the scores shown by the following Tables are presented in Annex I). In addition, it is worth noting that it was possible to have a continuous water provision even before the project, by making use of tanks and electric pumps, in particular in commercial and industrial buildings. Therefore additional effects in terms of impact on human health or 106 Direct economic growth, endogenous dynamics, social cohesion, environmental effects, territorial cohesion, institutional quality, social happiness. 33

40 increased productivity benefiting segments of the economy that depend on clean water do not apply in this case 107. Short term growth effects were also recorded by the companies and experts which were contracted for the execution and supervision of the works, who also benefited from development of technical capacity due to the innovativeness of some of the techniques used to implement the project. These effects however did not translate into long-term effects. Additional effects are in terms of endogenous dynamics and are represented by the improvement in the service provided, knowledge base and capacity, with an effect in terms of improved management system. Intangible effects are also recorded in terms of social happiness due to the sense of confidence and comfort in users and citizens enjoying, after such a long period of water rationing, a continuous water delivery. All these effects are relevant at the local (municipal) level, and the key stakeholders affected are citizens and employees of the municipal company. Table 3.2 EFFECTS 1. Direct welfare and economic growth IMPACTS* ON DIFFERENT STAKEHOLDERS 2. Endogenous dynamics Social cohesion STAKEHOLDERS Service provider Residential users Commercial and industrial users 4. Environmental effects Territorial cohesion 6. Institutional quality 7. Social happiness Government and citizens Local Regional National *-5 = very strong negative effect; 0 = no effect; 5 = very strong positive effect, = expected effects which did not materialise (the criteria considered to assign the scores shown by the following Tables are presented in Annex I). It is however worth mentioning that a number of potential positive effects did not materialise because of the discontinuation of the investment plan. The most significant among them relates to the reduction of water losses, which are still at a rate of about 47% of the total water fed into the system. Although continuity of water supply was the key objective of the interventions and water losses were instrumental in the achievement of such an objective, it still represents an indication of inefficiency in the water delivery system and places the 107 For example, hotels and tourist accommodation were provided with pumping systems, and therefore no additional indirect effects, other than the reduction in the private costs of operating the pumping systems, can be recorded. 34

41 Palermo water supply among the worst performers in Italy 108. The only, minor, environmental effect is in terms of a slight improvement in water quality. In addition, a missed opportunity relates also to the adoption by AMAP of an advanced system of long-term asset management planning according to best international practice 109, i.e. the adoption of a systematic investment planning approach balancing capital and operating expenditures. Under this approach an in-depth analytical understanding of the key performance indicators of the water network and the application of technical planning modelling should be the basis for long-term planning strategies. In order to do so, the capacity to fully monitor and meter network performance should be in place, together with a strategic and planning capacity at managing board level. Some of the planned and unrealised interventions as well as an in-depth renovation strategy within AMAP (selection of high-level technical expertise, support of advanced managerial skills), which was ultimately discontinued, were necessary for the achievement of such an ambitious objective. Table 3.3 Effect 1. Direct economic growth 2. Endogenous dynamics 3. Social cohesion 4. Environmental effects 5. Territorial cohesion 6. Institutional quality 7. Social happiness TEMPORAL DYNAMICS OF THE EFFECTS* Short run (years 1-5) Long run (years 6-10) Future years Comments Most of the positive benefits of the users materialised in the short term, while the gradual reduction of operating costs of AMAP has required a longer time Service provider improved its internal capacity and know-how, thanks to the new demanddriven management as opposed to the old supply-driven one No effect Slight improvement of water quality, no effects on water losses, which are still high No effect Missed effect The citizens of Palermo went from public protests and riots due to serious water rationing periods and service discontinuities to "not remembering" the water problem. Immediate large benefit to users. *+ = slight positive, ++ = positive, +++ = strongly positive, +/- = mixed effect (the criteria considered to assign the scores shown by the following Tables are presented in Annex I). 108 See ISTAT, 2009, Censimento delle risorse idriche a uso civile, Anno See for example the indications provided by Ofwat, the UK water authority ( 35

42 3.2 DIRECT WELFARE AND ECONOMIC GROWTH The welfare of citizens in Palermo positively changed after project implementation. Before project implementation residential users had to spend their own money to buy, operate and maintain water tanks which collected water during the time when the water supply was turned on, to be used during the days when water was not available; families had to spend time making sure of their water supply, by promptly performing the necessary tasks, on the days when they had supply; users had to incur the extra costs of repairing faults in home water systems and in household or industrial equipment, due to malfunctions in the municipal water system. However, during the periods of water shortages and severe droughts (especially in the years and ) the tank system was not sufficient to provide water to the population, and a system of public water distribution was organised. During these periods the frustration and inconvenience felt by Palermo inhabitants was extremely high. In these periods the population had, in term of water fed into to the whole urban network, a total of 70 million m 3 of water per year, corresponding to a gross 282 l/d per inhabitant and to a net consumption of 173 l/d/inhabitant. After project implementation ( ) the water fed into the water network rose to 88 m 3 on average per year for an individual gross availability of 360 l/d and an actual consumption of 190 l/d. The project implementation did not actually solve the problem in all the city districts: 25% of the network (corresponding to almost 25% of the total population) is currently still subject to regular disruptions. This is the part of the network which is in such a state of obsolescence that continuous water pressure would generate incessant breaks in the pipes and further disruptions in the service. In addition, it has to be mentioned that tanks and electrical pumps are still being used in tall buildings to bring water to the upper floors (water pressure is still too low to enable the provision at higher floors). Tanks fed by electrical pumps still exist and are operated. However, activities related to these are not time-consuming given that users do not have to take into account the rationing time, as the public supply system is always in operation (users do not now even realise that water is being supplying by tanks). Therefore, the current situation is much better than previously, and the current system is expected to be able to cope with possible future droughts should they occur, thanks also to additional investments in the water supply system undertaken after the project s implementation 110. As a result, the social benefit of the improved water service delivery has been quantified and monetised in the CBA in terms of avoided costs. They relate to three different complementary aspects: 110 However this depends on the severity of the drought episode. In cases of extremely severe droughts it may be possible that the obsolescence of some of the network sections could cause water shortages and, in the absence of additional required interventions, water rationing could still be the only solution in extreme cases. 36

43 time savings of users who no longer have to collect the information about days and hours of water rationing and manually operate pumps and water system at the right moment during the rationing time, corresponding to an estimated benefit of about EUR 13 million on average per year. This is by far the largest benefit relating to users inconvenience in having turned water instead of a continuous service; avoided costs of purchasing, maintaining and operating electrical pumps (in terms of electric power and maintenance costs) for the share and typology of population (civil or industrial users as well as those living in high apartment blocks or in small houses 111 ) impacted by the effect. The estimated benefits amount to about EUR 2.6 million per year on average. the avoided maintenance costs for domestic and commercial/industrial appliances connected to the water system (e.g. washing machines) suffering major operating inefficiencies due to the turned water supply (about EUR 205,000 on average per year). These long term effects (arising soon after project completion, in 2003, and still in place today) will be maintained as long as infrastructural investments and management capacity ensure that proper development and management of the entire water network is maintained. However, the current situation is not particularly promising in this respect: after the interventions under examination, few other interventions were implemented, mainly related to adduction and not the distribution system, while some of the already planned interventions related to the renovation of additional sub-networks were interrupted, notwithstanding availability of finance and a commitment already in place (see next Section for further details). A more efficient use and distribution of water resources affects not only residential users but also industrial and commercial ones. The cost savings related to water availability in such cases provide efficiency gains. Such effects materialised soon after project implementation, however no quantitative data are available on this aspect. An efficiency gain is recorded by AMAP itself, due to savings in maintenance costs related to the distribution network. After project implementation the newly built pipes, constituting 50% of the entire network, no longer need the demanding and frequent repair interventions required previously. Moreover, the new system does not require demanding daily manual adjustments, regulating water pressure in the pumps and adjustments according to a supplydriven type of management. By supply-driven water management we refer here to the centralised delivery system in operation before project implementation, which was aimed at regulating the total water volumes pumped into the system, based on water availability and the efficiency of the pipe operations. In fact, large teams of specialised employees were needed daily to monitor and intervene on pipes breaks, pressure problems and other related activities. After project implementation the delivery system became a demand-driven water management system, where the key driver is water consumption by users. The water fed into 111 Data about share and typologies of users were provided by AMAP while the quantification of costs has been made by the authors on the basis of data available in the literature and interviews to sector experts. 37

44 the system is now required to accommodate actual consumption (and not the other way round); therefore more accurate planning and metering systems are needed, while less specialised manpower is needed to manually operate the pumps and piping system. This is a long-lasting effect that materialised soon after project implementation. It has been quantified, monetised and included in the CBA and amounts to a cost saving of more than EUR 1.5 million on average per year, a financial benefit which is included in the CBA for the calculation of the financial profitability of the project. In terms of social benefit this effect is however lower: in the economic analysis labour force is corrected using a conversion factor lower than 1 to take into account the social benefit of employment, therefore a cost saving for labour in the economic analysis has a lower value 112, reflecting the loss of socio-economic benefit due to lower employment. It is worth noting that, according to the AMAP balance sheets, internal reorganisation of human resources included both a decrease in total manpower and a more than proportional decrease in the manpower used for the operation of the distribution network. Notwithstanding some rigidities in the internal restructuring process 113, additional efforts are now focussed on activities related to service management and administration rather than physical repairs. Among the activities that were recently promoted in AMAP are the following: Research activities related to water metering; Replacement of the old connections and metering system in order to improve the effectiveness of water metering and billing capacity; A campaign against illegal connections and unpaid bills; Customer satisfaction surveys now systematically carried out. Evidence regarding these activities is provided in the section below. 3.3 ENDOGENOUS DYNAMICS Strictly related to the previous effect, the project implemented brought about an improvement in terms of management knowledge and capacity, such that the internal capacity of AMAP benefitted greatly from its implementation. First, additional internal resources were freed up to be invested in alternative, higher level, activities. Second, the improved distribution system shifted the attention of management from the problem of water availability to one of water made available to users, and therefore on metering and billing, with an improvement in management quality. 112 The discounted value of the difference between the financial and economic benefit amounts to almost EUR 10 million. 38

45 Box 3.1 ENHANCED RESEARCH CAPACITY IN THE FIELD OF WATER LOSS CONTROL During the years AMAP carried out research on administrative water leaks in the urban water networks of Palermo, in collaboration with the Hydraulics and Environmental department of the University of Palermo. At research level the interest in apparent or administrative water leaks is rather new 114. Apparent leaks may be caused by water stealing 115, reading and billing mistakes on water meters 116, or problems of under-measurement. These problems are caused either by the ageing of the meters or by intentional manipulations by consumers. As far as the ageing of meters is concerned, the older the meters are, the higher the range of start-up 117 is. As regards consumption, private water tanks increase apparent water leaks: they generate a lamination effect which tends to reduce water volumes. The available literature had already highlighted the relationship between the ageing of meters and their measurement performance, but the relationship between private water tanks and under- measurement by meters was a new research strand. In order to investigate the issue and to definitively solve the problem related to the excessive difference between the water volume introduced into the network and the water volume billed, which persisted after the realization of new water networks in the city, AMAP conducted experiments and tests. First they tested the variation in measurement accuracy of meters in relation to different ages of meters on a sample of 700 meters 118. Then they tried to estimate the lamination effect generated by private tanks on water volumes considering five different types of users. Consequentially they tested the effect of the UFR device 119 which reduces the lamination effect of the private tanks. The outcomes confirmed the results of previous studies in that the average of the range of start-up and the average of the measurement mistakes increases as the age of the meter increases. Moreover the measurement accuracy of the meters also depends on the manufacture of the meter and on the quality of the water. Regarding the tests on the lamination effect exercised by private tanks, researchers found that the effect was stronger in the case of a continuous water supply: the lamination effect of the tank limits the opening of the floating valve in the water tank. This, together with the high level of the range of start-up in cases of low capacity, often generated high levels of measurement mistakes. These studies led the researchers to specific conclusions on the issue of apparent water leaks 120 : - meter ageing and the presence of private water tanks are the main causes of apparent water leaks; - the replacement of old meters with new meters 121 is the best strategy to decrease apparent water leaks; - the use of the UFR valve is not a good strategy since it is less efficient when applied to new meters, moreover its long term effects are unknown and it is a device under patent that is produced by just one firm in Italy; - it is preferable to undertake meter replacement by district in order to fully realise results in terms of 114 Water leaks consist of the difference between the water volume introduced into the water network and the water volume legally consumed by users. They can be divided into real and apparent leaks. The first are physical water leaks in the water distribution system. The second are also called administrative losses and, they consist of volumes of water that are not legally consumed by users and all types of measurement errors. More specifically, these volumes of water are consumed but not paid for by users, generating economic losses for the municipality. See also Figure Water stealing is the consequence of illegal connections to water networks, bypassing of meters and the voluntary manipulation of the same. 116 Reading and billing mistakes are the consequences of human mistakes: data are not read correctly and so are wrongly managed in the billing system. 117 The range of start-up is the minimum level of water volume registered by the meter. That is the level from which the meter starts to register the quantity of water consumed by the user. 118 The test was divided in two phases: first they tested 180 meters and subsequently they extended the sample to 700 meters. 119 The UFR (Unmeasured Flow Reducer) is a device invented in Israel. It is a valve which modifies the filling process of the water tank. In particular it is installed in the upstream or in the downstream part of the meter and changes the way in which the water circulates in the meter: in the case of low water capacity, the UFR transforms these levels of water volumes in level of capacities that overcome the range of start-up of the meter, while in the case of high water capacity, the valve does not operate. 120 See Giuseppe Arcuri, 2009, Analisi delle criticità e individuazione delle esigenze operative finalizzate alla realizzazione dei sistemi di misura della adduzione e della rete di distribuzione idrica urbana. 121 More specifically, the replacement of all meters that are more than ten years old. 39

46 fees recovery. After the experiments AMAP improved its knowledge of the nature of the difference between the volume of water injected into the network and authorized water consumption. The experiments will also be expanded and a cost benefit analysis on the measurement accuracy of meters, on their replacement costs and on other variables (water price, the presence and the influence of private tanks, the costs and the efficiency of UFR valves etc..) will be developed 122. Source: Authors The automatic monitoring system and the new connections to the main pipes drew attention to the fact that, although physical water losses were practically non-existent in the new pipes 123, a high percentage of unbilled water 124, as compared to the volume of water entering the system, was still being recorded. Investments were made in order to develop knowledge and capacity to improve the performance and effectiveness of the metering systems and research studies were carried out in this regard. 3.4 INSTITUTIONAL QUALITY In relation to the increased management quality of the service provided it is worth noting that a taskforce was put in place by AMAP to manage the problem of unpaid bills, and benefits were achieved via collecting additional revenues. The problem of unpaid bills is also related to illegal connections and water theft. In this regard a public campaign was recently promoted in order to raise public awareness, especially in schools, about the need to ensure legality in the use of water resources 125. This campaign was also promoted during a national forum on water supply held in Genoa in September Our commitment in terms of ongoing projects and undertakings cannot set aside the awareness that only by promoting the value of legality and a culture of civic respect will it be possible to promote water and its correct use, in terms of quality and saving as well as by accepting a fundamental principle: do not use tricks and wits to get water. Source: Vincenzo Cannatella, AMAP President, during the Water Festival 127 Although this is an interesting example of the potential institutional quality improvement a water project may bring about, in the case of the Palermo water supply system the aspect of institutional quality (of municipal and local authorities) did not materialize in a significant manner. On the contrary, this is an unrealized benefit. 3.5 ENVIRONMENTAL EFFECTS One of the main expected benefits of the project under assessment was to reduce water losses, which accounted for about 47% of the total water pumped into the system before 122 Fantozzi M., Criminisi A., Fontanazza C. M., Freni G., Lambert A., 2010, Le perdite apparanti dovute alla sottomisurazione dei contatori domestici, in Servizi a Rete, N 2 March April. 123 Some pressure problems in the new sub-nets (the Politeama net in particular) are at the basis of some still occurring disruptions causing complaints from users; however they are usually quickly repaired and cause no significant losses. 124 This percentage is unchanged as compared to the situation before the project See 40

47 project implementation. This would have produced an environmental benefit due to the saving of a scarce natural resource such as water. In particular it was expected that reduced losses would result, without affecting the quality of service while meeting the water needs of citizens, in less anthropical pressure on natural water resources, especially on groundwater, thereby reducing the volume of water pumped from the numerous wells. After project realisation virtually no physical losses were recorded in the new sub-networks. However, the water saved in the new sub-networks is used to ensure continuous pressure in the entire system (including the rest of the old network, with the exception of 25% of the pipes which are too obsolete to bear continuous pressure). Because of this, the old pipes, now put under pressure for 24h/day, are losing more water than previously, so that the total quantity of water losses did not change subsequent to project implementation. Management decided to eliminate supply disruptions rather than take the benefit of reductions in water losses, thereby increasing the quality of the water service rather than improving environmental sustainability. This managerial choice is in line with the global objective of the project, according to which the reduction of water losses was an instrument to achieve better service provision, rather than the ultimate goal of the intervention. However, the remaining water losses represent an inefficiency in the current system which would need additional investments to be solved. These interventions should address the obsolescence of the remaining sections of the urban water network via pipe repairs and replacement, according to a design which should be specifically developed. There is in fact no scope for completing the original Master Plan, which sufferings from design shortcomings such as for example the overcapacity of the pipes and tanks, due to overestimation of demand forecasts. Moreover, the field of water losses control has developed significantly in the recent past 128 and it might not be necessary to replicate the same technical solutions adopted by the interventions implemented in the period , as more effective ones are now available 129. This can imply for example a combination of replacing entirely some of the most obsolete subnets together with an operation and maintenance plan aimed at substituting some parts of the remaining nets, together with the adoption of measures to zone the networks, and to reduce the pipe pressure, including installation of automatic control devices and of other management measures. There is a scope therefore for a new plan to be developed, making use of state-of-the-art scientific knowledge 128 See in Annex V the list of references for a literature review on water losses control. 129 Based on technical and scientific literature (e.g., Farley M. and Trow S., 2003), the optimal control of water losses can be achieved by an appropriate mix of four categories of activities, the so called Four pillars of Leakage Management : Pressure management, Active leakage control, Infrastructure management and Speed and quality of repairs. The most appropriate leakage control policy will mainly be dictated by the characteristics of the network and local conditions. The main factor governing the choice, however, is the value of the water, which determines whether a particular methodology is economic for the savings achieved. Therefore, there is always a level of leakage which has to be tolerated, and which has to be managed. In fact, for any water distribution system there is a level of leakage below which is it not cost effective to make further investment, or use additional resources, to further decrease the leakages. In other words, the value of the water saved is less than the cost of achieving a further reduction. This point is known as the economic level of leakage (ELL). Leakage targets based on ELL must therefore be specific and dynamic. The choice of the proper target level of leakage, as well as the development of a program of actions and investments to be undertaken to achieve and maintain it during the course of the water service through the years, must be based on extensive knowledge, both physical and functional, of the water system, which the service supplier may acquire through extensive and accurate surveying and studies of the networks, including physical and topographic mapping of the networks, customer investigation, development and calibration of hydraulic models and precise water balances, hydraulic simulations to identify the critical water loss areas, leakage research and monitoring, metering campaigns, etc. 41

48 to address the current problems. As a rough indication, the Three years Operational Plan of AMAP estimates current investment needs amounting to EUR 13 million, to which have to be added EUR 1.5 million per year for the scheduled maintenance of the network. In addition, the rehabilitation of the entire network will be completed with the construction of the Pitré tank, the investment cost of which (originally estimated at about EUR 30 million) can be significantly reduced according to more updated and realistic figures of the expected water consumption. A slight environmental effect is recorded in terms of improved water quality. This is not a direct but rather a side effect of the improved quality of the water distribution network. A decrease in the pipe disruptions reduces the chances for water contamination. At the same time, however, the not fully suitable supply system of the new sub-networks (expected to be replaced as part of the original plan but not actually completed) at times produces too low a water speed, leading to water deposit in the pipes which is then delivered to users when the pressure normalises and the water velocity in the pipes increases. As a result, a swinging complaints trend related to the quality of water is recorded. This effect is long-lasting and directly related to the project s implementation. However it is a secondary, relatively insignificant effect, which was not quantified in the CBA. 3.6 TERRITORIAL AND SOCIAL COHESION The project did not produce significant effects in terms of either territorial or social cohesion. Although the project was implemented in one specific area of the city the effects spread to the entire municipal territory. In terms of social cohesion the project did not have significant effects on vulnerable groups, although some improvements in the quality of the water service were achieved in the most socially fragile districts. 3.7 SOCIAL HAPPINESS During the most severe drought episode, citizens of Palermo suffered such severe inconvenience, that street protests caused problems of public disorder (for example, in June 2002 protesters occupied the city Cathedral) 130. Private water tanks were not adequate, and citizens as well as public buildings were supplied by tanker 131. It was recorded for example that in the municipal prison detainees were only allowed to take a shower twice per week. 130 See: Siccità: Palermo è a secco e la protesta diventa rivolta. (La Repubblica, 14 May 2002); Torna la guerriglia urbana nella Palermo senz'acqua (La Repubblica, 4 June 2002). 131 Each tanker charged 27 Euro for private users, and was free for public users (Source: I cittadini senz'acqua occupano la cattedrale. (La Repubblica, 5 June 2002) 42

49 Figure 3.1 STREET PROTESTS DURING A SEVERE DROUGHT IN 2002 Source: La Repubblica.it Project implementation had a positive and significant effect in terms of social happiness, in terms of the sense of confidence and convenience derived from having a continuous water service as well as the sense of social pride from living in a municipality ensuring a certain quality level in a basic utility service. Figure 3.2 TREND IN COMPLAINTS RELATED TO THE WATER SERVICE 35,000 30,000 25,000 For losses For water quality For the service delivery 20,000 15,000 10,000 5, Source: AMAP, Customer Satisfaction Survey Citizens acknowledged the almost surprising improvement after the project s implementation. Since 2003 no similar events have occurred and satisfaction with the water supply system has improved. The customer satisfaction survey carried out by AMAP shows a decreasing trend of complaints. 43

50 44

51 4 DETERMINANTS OF PROJECT OUTCOMES In this section the key determinants of the long-terms effects discussed in the previous chapter are illustrated and discussed. After a brief presentation of the key messages, each significant determinant is presented and evidence and arguments supporting the findings are presented. 4.1 KEY FINDINGS The project was the right initiative in the right place and at the right time. The appropriateness to the context was in that regard very high, since the interventions appropriately responded to a pressing and widespread need of the population. This has already been discussed and illustrated in the previous sections. There is a shared opinion regarding the fact that the governance structure of the project played a determining role in shaping the project s long term performance. It actually provided a mixed contribution. In the initial phase it was the key factor boosting project implementation thanks to a happy combination of political will and high technical capacity. In the second phase of the project however, this positive effect lost momentum and the governance structure was less effective in overcoming a series of institutional constraints which actually determined the longer term impasse in the project. Managerial response in this case is included in the governance structure dimension since AMAP s capacity to promptly react to the changing context is embedded in the interplay of governance actions. Project design and forecasting capacity are an interesting aspect of the project. Despite the technical capacity put in place in the original design, some controversial aspects could still be identified. The first relates to the appropriateness of the underground component already discussed in Section 2, while the second relates to the overestimation of demand. Neither of these aspects hampered the chances of the project producing positive results, but they reduced the actual benefits produced. Table 4.1 IMPACT OF KEY DETERMINANTS ON PROJECT S PERFORMANCE Strength* 1. Appropriateness to the context Project design Forecasting capacity Project governance ±5 5. Managerial response ±5 *-5 = very strong negative effect; 0 = no effect; 5 = very strong positive effect (the criteria considered to assign the scores shown by the following Tables are presented in Annex I). 45

52 4.2 PROJECT DESIGN AND FORECASTING CAPACITY Notwithstanding it proved to be quite an advanced intellectual exercise and well-qualified professionals were involved in it, the original design of the Master Plan presented at least two major weaknesses. The first relates to the component addressing water provision and the proposed solution of a highly expensive and technically complicated underground gallery to be used to feed into the distribution network. This solution caused some controversy among the experts since not everybody was convinced of the real need of it. In particular, on one hand doubts were raised about the supposed water need, which for some experts was rather overestimated (see also below) and did not justify such a huge adduction system. On the other hand, there was a common view that distribution rather than adduction was the key limitation in the system, and therefore renovation of the pipes in the sub-networks was a priority as compared to other interventions. At the time of the project implementation, administrative and technical limitations imposed on the AMAP board a more pragmatic approach to the problem, and due to financial availability and the short timeframe for presenting the application for co-financing, it was decided to start with the sub-network components, thus overlooking the gallery component. As part of a wider strategic infrastructure plan, the approach the management board had in mind was to adjust the project design at a later stage, and to include additional interventions aimed at rationalising also the adduction system, without implementing the gallery solution. However, when the management board changed, this long term strategy was discontinued and the realised components appeared as necessary but fragmented interventions. If I had to implement the project now I would take some more time to prepare a proper design. But we did not have this chance, we had to rush and the executive design was already approved, so we did our best with the available resources and information. In any case the project was implemented and it survived several administration changes so from this perspective it is a great success. From a broader perspective however it reflects some missed opportunities. If I had a magic wand I would first change the people, then the project design. Source: Interview report Another weakness of the original design relates to the overestimation of water demand. A major forecasting error was made in this respect, in particular as far as the demographic trend was concerned. In fact, demand analysis made ex ante was based on the assumption of a demographic increase, notwithstanding an already stagnant population. It was assumed that the urban regeneration initiatives undertaken by the administration at that time would have brought inward migration to the historical centre. Not only did this not happen, but a negative demographic trend was experienced. 46

53 Figure 4.1 FORECASTED AND ACTUAL POPULATION GROWTH IN PALERMO 1, Actual data and updated forecasts Forecasts in ex-ante CBA Source: Authors on ex-ante CBA and ISTAT data On top of that, the forecasts of per capita water consumption after the project were also overestimated, being almost double the actual value. This stems from the assumption that with a more reliable delivery system people would significantly increase their water consumption; however this did not hold true, since the improvement in the service quality translated only into better quality of life for citizens (more reliable water consumption) rather than an increase in quantity demanded. Table 4.2 FORECASTED AND ACTUAL WATER CONSUMPTION, M 3 Years Actual Forecasted ,580,573 95,300, ,786, ,800, ,675, ,100, ,700,000 Source: Authors on ex-ante CBA and AMAP actual data These demand assumptions were however rigid from a planning point of view, since they were prepared in accordance with the regional Master Plan of the Waterworks 132, in force at that time in Sicily, a basic programming document binding for each aqueduct project, and that only in recent years has been reviewed (the new version is currently still awaiting final approval). This plan indicated a target of 432 l/inhabitant/day for water consumption (the actual figure is 190/l/inhabitant/day) and an increasing population growth. Therefore, demand forecast analysis was not prepared specifically for the Master Plan but in compliance with this mandatory condition. The impacts on the project are manifold and relate to an overall overcapacity in the new pipes and tanks. Given that the cost of pipes represents a share of around 22-23% of the project 132 Piano Regolatore Generale degli Acquedotti (PRGA),

54 total cost (as already mentioned in Section 2), the impact of the larger pipes required by the demand overestimation (leading to pipes of a larger diameter) has been quantified at about 5-6% of the total costs. The impact on the tanks and adduction pipes is however larger, both in terms of costs (tanks investment costs are proportionate or even more than proportionate) and of management efficiency. For example suboptimal water pressure and speed levels cause quality and pumping problems. We knew the figures for future water consumption were not realistic, we were not confident about them, however no one would have approved a project with figures not complying with the Plan and we were forced to use those figures. The impact on project costs is however not significant. Source: Interview report The board of AMAP during project implementation was aware of the limitations of this forecasting exercise and tried to minimise its impact on the project. For example, it was decided not to undertake the element of the underground gallery deemed not strictly necessary. Within the intentions of the long-term company development plan there was an idea to adjust and redesign some of the components of the original Master Plan, in particular those related to water adduction; however a change in management stopped the implementation of the broader strategy. 4.3 PROJECT GOVERNANCE Evidence and opinions collected with the present analysis support the assessment of the project governance structure being a key project determinant. The governance structure of the water supply system in Palermo is rather simple, but if assessed from a long-term perspective, the relevance of the interplay between three different dimensions affecting governance performance is clear. These are in particular: Political will and commitment Technical and managerial capacity Institutional framework Financial resources As already mentioned, the water supply service in Palermo has long suffered from mismanagement and the influence of organised crime. The lack of proper urban planning (with some cases of property speculation episodes) during the period of the city s expansion caused the first stress on the development of the physical water infrastructure, which followed the westward expansion of the city and resulted in fragmented actions mainly aimed at making more and more water available to the system. 48

55 Figure 4.2 GOVERNANCE STRUCTURE OF THE WATER SUPPLY SYSTEM IN PALERMO European Institutions European Investment Bank European Commission National Government Ministry of Public Works Sicilia Region Municipality of Palermo OTA 1 Palermo Other municipalities in the province of Palermo AMAP Acque potabili Siciliane s.p.a. (APS) Palermo water supply system * OTA1 enters into the project s governance after the project implementation Note: Dashed lines are used to indicate past/temporary responsibilities or tasks. Source: Authors There was a shared opinion that dry weather was the primary source of water shortages, while inefficient management of the existing infrastructure was a more critical aspect of the story, as the study carried out by AMAP in 1978 revealed (see Section 2). Regarding the water problems, the attention of people of Palermo has been skilfully diverted towards the sun: they are more used to scrutinizing the clouds rather than the municipal council and to get angry with the weather instead of with the municipal company management. Source: Giuliana Saladino, quoted by Gabriello Montemagno in Repubblica.it, 28 July The political, cultural and institutional context underwent a radical improvement in the middle of the 1980s. The water supply project in Palermo was implemented during the so-called Palermo Spring (Primavera di Palermo) or Palermo s Renaissance, a period characterized by a deep cultural and political renewal 133 and in particular by a strong emphasis on civic renewal and the fight against organised crime. From a political and institutional point of view this 133 The period is recalled as being characterized by a euphoric mood in and around city hall. (Source: Schneider, Jane C., Schneider, Peter T., 2003, Reversible Destiny: Mafia, Antimafia and the Struggle for Palermo, Paperback, University of California Press, California). 49

56 period represents a total break with the past and the improvement in quality of life and public management were tangible effects 134. Box 4.1 THE PALERMO SPRING The city administration, under the inspiring leadership of Leoluca Orlando 135, elected mayor of the city for the periods and re-elected for the period , strongly committed to promoting and valorising the image of the city in Italy and abroad after a period of growing mafia power. Much effort was put into improving citizens quality of life with a number of urban regeneration actions, especially in the historical centre, and investment for public local services. Civic renewal of the city was supported by promoting multi-faceted cultural and educational school-based initiatives, in particular to promote the principles of legality and civic pride, in connection with the fight against organized crime 136 and the promotion of the antimafia movement within local society. According to press articles many public contracts to companies suspected of being connected to criminal families, especially related with the maintenance of public facilities, were discontinued. As the former mayor puts it: in 1985 when I became mayor for the first time I asked the secretary general for the municipal budget, but we did not have one, meaning we did not know what was owned by the municipality and where the assets of the city were. In 2000 Moody s gave us Aa3, like Stockholm, Boston or San Francisco 137. Source: Authors In 1983 all the private wells supplying the Palermo system were seized and expropriated by judicial power. The management board of AMAP was firstly renewed in 1989 and subsequently radically renewed in 1994 when almost all the managing directors retired 138. In a break with past practices, the management board and president of AMAP were selected through a public, open and transparent, recruitment process. The experts appointed to the Board were selected solely on the basis of their professional profiles. It has been acknowledged by all the interviewees that the team of experts involved in the project, both at municipal and at central level, included some of the best available water engineers and technicians in Italy and that the technical capacity deployed was unprecedented. 134 All the interviewees recalled that period as a magic moment. 135 An Italian politician, lawyer and Professor of Law at the University of Palermo, best known for his strong opposition to the Sicilian Mafia. Leoluca Orlando, a former Christian Democrat who broke with his original party s Mafia-linked old guard in 1987, was a courageous, dynamic and above all uncorrupt city boss in Palermo until he stood down a few months ago to run (in vain) for president of the island s regional government. Source: The Economist, July 5th Palermo is spending a fortune on establishing itself as a centre for cultural tourism, mounting hundreds of musical and theatrical events. Many of its buildings have been beautifully restored. Those tourists who come say they feel safe. Yet it will be many years before the city sheds its worldwide reputation as the city ruled by the Corleone family. Source: The Economist, Nov 6th Source: At present and for a long time, there has been no evidence of involvement, even marginal, of organised crime in the management of water services in Sicily. 50

57 For the sake of clarity it has to be stressed that, solving the central problem of reducing water losses in the network requires a long-term commitment centred both on the replacement of the most degraded sections of the distribution network, a research effort to identify continuing losses in the remaining sections of the network (manageable with internal company resources), and a complete company restructuring emphasising the centrality of operational departments and reducing the current organisational contradictions. Source: Piano Programma, 1998 The board committed to a long-term strategy of company renewal under the guiding principle of ensuring a certain quality of service provision to the citizens. Spurred on by the rationalizations introduced with the new legislative framework of sectoral reform (1994), the company development plan aimed at promoting an advanced asset management system and an overall improvement in the effectiveness and efficiency of AMAP performance. Under this framework the planned investments were merely a short term priority to solve the urgent needs of the population. The enhancement of internal resources, in particular by improving the technical and operational capacity 139, was a key enabling factor. Box 4.2 THE AMAP PERFORMANCE The performance of AMAP, as compared to similar companies in Italy, was not particularly good, especially under the profile of labour productivity. This partly reflected the fact that, as highlighted in previous parts of this report, its management practice has been characterised for long time by political clientelism and poor professionalism. A benchmarking analysis 140 carried out on selected water service providers in Italy highlights the performance of AMAP as compared to other water companies in the period under some aspects of infrastructure management and financial structure. Although the period of this analysis relates to years after the project implementation, the results are still indicative of the main problems in AMAP 141. The figure on the turnover per employee is the most striking, being the lowest one and more than a half of the average figure of the sample. It is worth mentioning that the current performance of AMAP is better under some of the aspects indicated in the table. For example, according to the AMAP balance sheets, in the year 2010 the personnel costs were 44.9% of the total operating costs. In the same vein, it is likely that the performance of AMAP at the time of the new management appointment was more critical than the one depicted in very broad traits in the table below. The technical and professional profile of the new AMAP board was a totally new element in the project s scenario. The strategic ambition of the managerial board spread far beyond the mere intention to undertake the water network investments, but these were just the first step of a more far-reaching aspiration of company modernisation and strategic renewal. Source: Authors 139 When the AMAP board was appointed there were more administrative staff than engineers and technical staff. 140 Caliman T. e Pianta G., Gennaio 2008, Analisi di Benchmarking,, from Le imprese nel settore idrico in Italia: un analisi di benchmarking, edited by Senn L., Fondazione Amga, Gianfranco Angeli Editore, 2008, Milan, Italy. 141 According to the Authors knowledge this is the most recent analysis available on the subject. 51

58 Table 4.3 Water service provider AMAP PERFORMANCE AS COMPARED TO SIMILAR COMPANIES IN ITALY Water losses (%) Number of control of metering per year Number of bills per year Personnel Cost/ Total Cost (%) Average Turnover per employee (Euro) Acqualatina , GORI 51.0 n.a. n.a , Acquedotto del Fiora , AQP , AMAP , Publiacqua , Acque , ASA ,000 n.a. ASM BS n.a. 160,000 n.a. ASPEM n.a. AcegasAps ,000 n.a. Enia ,000 n.a. NuoveAcque , VESTA n.a. 135,000 n.a. SMAT , Multiservizi ,000 n.a. HERA 23.5 n.a. n.a ,000 n.a. AGSM VR ,000 n.a. AGESP n.a. 200,000 n.a. CIIP n.a. 115, Teaacque ,000 n.a. ACSM n.a. 350,000 n.a. ACEA ATO , Idrotigullio , ARIN , CAP gestione 16.0 n.a , Servizi Idrici Novaresi n.a. 151, MN ,000 n.a. Mediterranea delle Acque* ROS , a) b) c) Source: Authors on data available in Caliman T. and Pianta G. (2008). Data on ROS refer to * The company Mediterranea delle Acque replaced Acquedotto Nicolay in 2006 and incorporated two further companies Genova Acque and Acquedotto de Ferrari Galliera; a) the value is referred to the company Acquedotto Nicolay; b) the value is referred to the company Genova Acque; c) the value is referred to the company Genova Acque. (%) 142 ROS (Return on sales) represents the operating profit margin. It is the ratio of operating profit divided by net sales, usually presented in percent. 52

59 The combination of political commitment and technical capacity was then supported by financial provision from the Structural Funds, which played a catalytic role in enabling project implementation. The management of the municipal operator found a prompt response to a number of constraints and limitations in the context and circumstances (see for example the problems with the original project design mentioned in the previous section), in order to speed up the administrative process and benefit from the EU funds made available at the central level. Moreover, constructive relationships were established with the Ministry of Public Work (formally the managing authority) which maintained a continuous follow up on the project, and with the other stakeholders, in particular with the Italian desk of EIB. The EIB expert was a highly competent engineer with extensive worldwide experience at the World Bank. He made a field visit to the water network and scrutinised the pipes with instruments such as the ones used by doctors for heart monitoring. He provided quite relevant remarks and pointed to the need to have new connections to the renovated sub-networks. Source: Interview report A significant input was in fact provided by the EIB which, despite the already existing technical designs and cost benefit analysis provided to the EU, sent an expert for a field visit. The EIB approved an additional sum for a loan to be specifically addressed to replacing the old connections with new ones. Less influential was the role played by the Commission, which relegated itself to a mere funds provider at the time of the co-financing decision. No other input was provided either upstream at the design stage or downstream at the implementation and operation stage. At the design stage, as showed by the example of the EIB, the availability of technical expertise is a key requirement for a thorough understanding of the context (for example the implication of having only part of the entire restructuring plan financed) and to ensure an effective dialogue with the implementing body during the downstream phase of the process. A more strategic approach would have involved exercising some pressure on the municipality after the implementation of the first interventions, to ensure the additional works were completed. This would imply adopting a broader perspective, looking at the entire development plan more than on single physical interventions. Later, in the following programming period, specific conditions could have been imposed by linking the approval of additional investment in the same area and sector to the completion of the works already financed in the past. It is therefore worth noting that continuous follow-up activities are required in order to guarantee that the ultimate development goals are fully achieved and the conditions triggering development results are fulfilled. Project implementation progressed smoothly throughout the whole construction period ( ). However, the positive conditions that enabled the project to be implemented were no longer ensured and the political, institutional and managerial context experienced a radical change. The municipal administration changed and a new management board was appointed at AMAP. 53

60 Additional interventions were foreseen, however the magic moment (a combination of political will, technical and financial capacity) was interrupted. This happened in 2002/2003, when the OTA was set up and some responsibilities were shifted from the municipality of Palermo to a higher level. Source: Interview report At the same time part of the responsibilities regarding planning and investment of water infrastructure and services were shifted to the OTA, and this created a period of institutional and planning impasse. Box 4.3 THE OTA 1 OF PALERMO The Optimal Territorial Area 1 (OTA 1) of Palermo143 comprises the association of 82 towns in Palermo province. The resident population of OTA, 1,249,577 inhabitants at 1 January 2011 (ISTAT), mostly live in Palermo (655,875 equal to 52.5% of the total), and the remaining part lives in other 81 towns (593,702 equal to 47.5% of the total), from the smallest (Sclafani Bagni with 454 residents) to the largest (Bagheria with 56,336 residents). The area of the OTA is 4, square km; the population density is inhabitants per sq. km. Palermo Source: Authors The Authority of OTA (AOTA) was appointed on 1 of July 2002; the relationship between local authorities and the AOTA is regulated by a convention 144. The ambit plan was drawn up and approved on December Subsequently, AOTA, with several acts, assigned the IWS to a private company, without any municipality participation, to be chosen through an open tender 146. It was also decided to maintain continuity of the service management only in Palermo, by allowing AMAP S.p.A. to remain in charge until the termination of the contract 143 See: See: pdf 145 See: Namely, with a concession to a third party, in compliance with paragraph 2 of Art. 150 of the Art. 150 del D. Lgs. 152/