1 thesis defend, csaba rigó, 2009 sustainability of the wastewater collection and treatment project...

1THESIS DEFEND, Csaba Rigó, 2009

Sustainability of the Wastewater Collection and Treatment Project in Zalaegerszeg Agglomeration

Made by Csaba RigóCorvinus School of Management

2009

Supervisor: Dr. Sándor Kerekes

THESIS DEFEND

„Who foresees three days, he will get three more years. „(a Japanese saying)

June 24th, 2009

2June 24th, 2009

OVERVIEW The structure of the presentation

Applied CSM knowledge: Corporate Social Responsibility,

Strategy Process, Applying strategy, Understanding Financial

Statements, Corporate Finance, Marketing Communication

Problem statement, hyphotheses (1 slide)

Strategic options, evaluation (1 slide) and recommendation

Presentation of the project and target setting (2 slide)

2 min.

1 min.

9 min.

2 min.

Analysis with built inconclusions (7 slide)

THESIS DEFEND, Csaba Rigó, 2009

14 minutes and 11 slides

33

PRESENTATION OF THE PROJECT

1. Zalaegerszeg downtown

2. WWTP and sludge system

3. Sewerage pipelinesNorth-East sewage systemSouth part sewage systemNorth-West sewage system(All is FIDIC Red Book)

4. Design of the sewage system

5. FIDIC engineering

June 24th, 2009 THESIS DEFEND, Csaba Rigó, 2009

New facilities sewage system (FIDIC Yellow Book)

Extending and improving WWTP and sludge handling (FIDIC YB)

3 construction and 2 agreements about services Summary of the project details

Start Date: 14th December 2004

Completion Date in current CD: 30th May 2010

Population (settlements): 85 983 prs (42 settlements)

Biological cleaning capacity of the WWTP: 170 000 PE 230 000 PE

Avg. connection rate in the agglomeration: 57% 85%

Budget (gross): 48 877 968 EUR

EU funding subsidy (gross): (75%) 36 658 476 EUR

Hungarian government (gross): (15%) 7 331 695 EUR

Beneficiaries (gross): (10%) 4 887 797 EUR

Contracted amount (gross): 45 930 032 EUR

Paid amount /31st May 2009/ (gross): 88% -> 40 418 428 EUR

Approved Cost Savings (gross): 1 747 446 EUR

Price contingency (gross): 1 074 010 EUR

Total savings (gross): 2 823 456 EUR

VAT 8 800 000 EURhttp://www.kazeg.hu

The investment is in process!

44

Vision:

TARGET SETTINGMission, vision, the way to the target, strategy

Target:

Mission:

„We implement a sustainable wastewater treatment system based on targets due 2010.”

„We work for a better environment for people.”

Protect Lake Balaton and Zala River (reduce load of phosphorus and nitrogen).

Extend the regional sewerage pipelines.

Improve operation safety and extend the biological capacity of the WWTP.

Provide new sludge treatment line.

1. Be the No. 1 or 2 in successful implementation of Hungarian Cohesion Fund projects.

2. Maximize the investment budget, maximize the support from EU, minimize own resource!

3. Public procurement is about quality and high technical content.

4. „Financial sustainability”: load up Development Fund for the future additional investments.

5. Communication is about investment benefit.

Original strategy:


55

PROBLEM STATEMENT


More exciting questions:

- What's up with the investment economies of scale?

- How the total return can be ensured in the future?

- What is the optimal amount of the Development Fund?

- Do increasing tariffs influence consumption?

- Local PR or central communication?

Average cost structure of wastewater tariff

22%

27%

51%

Operational expenses

Tax burden

Development source

Development Fund for reconstruction

HYPHOTHESES

1. The macro-environment of the project has changed, the project has to be examine before finishing the programme in consideration of the economies of scale.

2. Raising of Development Fund for future reconstruction should be based on reconstruction schedule!

3. Excess of residual source can cause headache and results higher tariffs.

4. Increasing tariffs influence consumption and outstanding debt.

5. Local taxes can not be a choice of the depreciation included in tariffs.

6. Well-managed local PR is more useful than general (central) communication.

HYPHOTHESES

66

ANALYSISKey drivers of the changes of the macro-environment

Political dimension

Economic dimension

Minority administration (reforms in tardiness) have the institutional background hesitated Proposed change of the tax law (VAT law, local taxes) Planned restriction of the social supports

Termination of the big users (companies of the food industry) High interest levelIncrease of the unemploymentDecrease of the disposable incomes, decrease of the spending power (PPP)

Decrease in the population, alteration in the lifestyle, decrease of working activity Alteration of the consumption habits, decreasing drinking water consumption Rise in the expenses of the public utility in the household consumption Recession in the building operations in the surrounding districts of Zalaegerszeg and in the country

Sociocultural dimension

CONCLUSION 1. Over-bureaucratized decision mechanism.

Technological dimensionAppearance of more developed technologies, alteration of the life cycle of the built-in materials and equipmentsRise in costs of energy and chemicals

Environmental dimensionProposed alteration of the law about water management Changing in the fees for soil strain

Legal dimensionChanging of the local regulations about the public utility connections (rise in the fees of connecting-up)

CONCLUSION 2.The macro-environment of the project has

changed.


77

ANALYSIS The position of the project determined by CBA in economies of scale matrix

CONCLUSION 3.The original CBAsays the project isjust economies ofscale. BUT!It might becomeeasily deadlock orquestion mark.

Average wastewater discharge per capita

115

79 8165

89 96 97

0

2040

60

80

100120

140

Budapest Debrecen Győr Miskolc Zalaegerszeg Pécs Szeged

litre

/day

/per

son

Average wastewater treatment unit cost

188 198

308

187

312

224253

050

100150

200250300350

Budapest Debrecen Győr Miskolc Zalaegerszeg Pécs Szeged

HU

F/m

3

The calculation method maydiffer in each town however!

It has already includedthe extra running costsof the 1st stage and the70 % of the

depreciation.


88

ANALYSIS The depreciation built in the pubic utility charges Proposed reconstruction plan

Reconstruction plan (50 years)

-

100 000 000

200 000 000

300 000 000

400 000 000

500 000 000

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

2053

2056

Years

HU

F

Less reconstruction demand based on vendors’ expertise andoperator’s experience.

Joint decree no. 14/2004 (VIII. 13.) of TNM-GKM-FMM-FVM-PM 39/A. § (9)

Government decree no. 249/2000 (XII. 24.) Depreciation rate (%)

Constructions in WWTP 2

Buildings (instead of 3% in consideration of the lifetime)

2

Mechanics and electric equipments 14,5

Control engineering and IT 33


Decision brought from beside a table.

Accountancy Model A

(„24 years duration”)

99

ANALYSIS 3 accountancy models as the alternative of the project’s total return

0

2 000 000 000

4 000 000 000

6 000 000 000

8 000 000 000

10 000 000 000

12 000 000 000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Years

HU

F

Model A („24 years”) results the excessive residual source!

Calculated depreciation is near 514 million HUF/year on the long run in Model A.

0

2 000 000 000

4 000 000 000

6 000 000 000

8 000 000 000

10 000 000 000

12 000 000 000

Years

HU

F

Model B („35 years”) gives still excessive residual source!

Calculated depreciation is near 348 million HUF/year on the long run in Model B.

0

2 000 000 000

4 000 000 000

6 000 000 000

8 000 000 000

10 000 000 000

12 000 000 000

14 000 000 000

Years

HU

F

In Model C („50 years”) reconstruction is ensurable with less residual source!

Calculated depreciation is 244 million HUF/year on the long run in Model C.

CONCLUSION 4.- There is residual source in both of Model A, B and C.- Model A or B results excessive residual source, that raises tariffs more.- Raising of Development Fund should only be based on reconstruction schedule!

One time extra rising of Model C

0%

5%

10%

15%

20%

25%

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

2053

2056

Years

% o

f p

revi

ous

year

b

ase

Two times extra rising of Model B

0%

5%

10%

15%

20%

25%

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

Years

% o

f p

revi

ous

year

bas

e

Five times extra rising of Model A

0%5%

10%15%

20%25%

Years

% o

f pre

viou

s ye

ar

base

CONCLUSION 5.Model C is more sustainable in social respect. Model A and B is a financial approach rather than a sustainable solution.

1x

2x

5x


10

Drinking water consumption in Zalaegerszeg and its agglomeration

0

50

100

150

200

250

300

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

Lit

re/d

ay/c

apit

a

Zalaegerszeg (litre/day/capita) Agglomeration Average

10

Why is the total return in social respect important?

Because consumption is shrinking. Consumption of Zalaegerszeg significantly influences the average consumption of the agglomeration.


ANALYSIS

Drinking water consumption and tariff in Zalaegerszeg

283254

230209 205 204 196 189 188 186 193 189 186 189 179 166 161 158 150 136

14 18 29 39 46 54 62 73 85 98 104 113 125 133161

203 208233

269

341

0

50

100

150

200

250

300

350

400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Consumption (litre/day/capita) Drinking water tariff (HUF/m3)

CONCLUSION 6.Increasing tariffs influence consumption.It has been justified for 5 years.

Correlation between water consumption and tariff in Zalaegerszeg

050

100

150200250300

350400

0 50 100 150 200 250 300

Consumption (litre/day/capita)

Dri

nkin

g w

ater

tar

iff

(HU

F/m

3)

The drinking water tariff is raising more intensivebelow 190 litre/day/capita consumption.

A typical example for consumption and tariff in Egervár

10 16 29 39 46 61 86 107 125 149 159

484 521 558626

721792

880

9821044

144 137 139 118 116 107 97 101 112 114 117 101118 108 109 104 106 103 104 103

0

200

400

600

800

1 000

1 200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Drinking & wastewater tariff (HUF/m3) Consumption (litre/day/person)

Beside the drinking water tariff, the wastewater tariff is implemented also in 2001. It did not cause a notable decline in consumption.

But what is the situation in country of the agglomeration? How does relate tariff and outstanding debt?

Drinking water tariff and outstanding debt in Zalaegerszeg

14 18 29 39 46 54 62 73 8598 104 113

125 133161

203 208233

269

341

0 0 0 0 0 0 0 0 0 0

3,2

2,2

2,7

1,7

2,22

2,42,6

3,8

0

50

100

150

200

250

300

350

400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

0,5

1

1,5

2

2,5

3

3,5

4

Drinking water tariff (HUF/m3) Outstanding debt (% of revenue)

CONCLUSION 7.Increase of tariffs is one of the reasons has influenced outstanding debt for 5 years.BUT! Outstanding debt is bear by liquidation of food industry firms also.

1111

ANALYSIS

CONCLUSION 8.The project mighteasily become deadlock orquestion mark.

It depends on thesize of investmentand wastewater volume.


Development source built in tariff in Zalaegerszeg and its agglomeration

460 480 500 500

726828

0

200

400

600

800

1000

2004 2005 2006 2007 2008 2009

Years

mill

ion

HU

FCONCLUSION 9.Both of Model A, B and C results in enough residual value.Depreciation built in tariff is more practical than local taxes.

The position of the project to be expectedDevelopment source built in tariff

1212

ANALYSIS Well-managed local PR or general central communication?

CONCLUSION 10. „To be more concrete!”

Well-managed local PR is more useful than general central. The communication should be about: economies of scale density of sewer connections operational issues (predicted tariffs) quality of drinking water (www.zalaviz.hu) „sustainable consumption” motives of raising of tariff (www.kazeg.hu) assessment of affordability

LOVELY BUT THAT IS ALL!The general communication popularizethe EU support does not have much sense.

http://www.nfu.hu//videoanyagok (information viewed on April 24th, 2009)


1313

RECOMMENDATION BASED ON CONCLUSIONSStrategic changeover is needed!

1. Be the No. 1 or 2 in successful implementation of Hungarian Cohesion Fund projects.

2. Optimize the investment budget, maximize the support from EU, to minimize own resource!

3. Public procurement is about quality and price competition.

4. „Social sustainability”: load up Development Fund is required for future reconstruction, no more!

5. Communication is about „sustainable consumption”.

CORRECTION

CONCLUSION 1-10.


Options Grade

Investment budget Minimize Maximize Optimize C

Public procurementQuality and price

competitionQuality and

high technical contentC

Total return of project With respect to society With respect to finance A

Communication General Local PR B

Proposed strategy:

1414

THANK YOU!

Thank you for your kind attention!


1 thesis defend, csaba rigó, 2009 sustainability of the wastewater collection and treatment project...

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