Hungary: under new management - What Price Water? - includes related article on mineral water - privatization of the country's municipal water-supply systems - Cover Story

Hungary is diving into the whirlpool of privatization but the country's new water companies have failed to make a splash

It looks the same. Tastes the same. It even smells the same, with that familiar foul whiff of chlorine. But the seemingly ordinary glass of water is becoming more and more precious for the two million inhabitants of Budapest. Between 1991 and 1999, water prices increased threefold. Across Hungary, people have seen their water bills grow as much as five times as state budgets dry up, leaving public utilities to either cut services or charge higher rates.

After 40 years of socialist mismanagement, Hungarians have developed an allergy to anything centrally-run. As a result, the water utilities, which used to be run mostly by state bodies, were transformed into share-holding companies belonging to the municipal governments between 1991 and 1994. However, many of the local governments are finding the responsibilities of the companies to be more than they bargained for.

To begin with, municipal authorities had to raise the water bills of the people who elected them. Second, the inherited infrastructure is in need of major investment. While the supply system ensures that almost everyone has water, very little of the water used is treated. In Budapest, for example, about 70 per cent of all waste water is dumped into the Danube each year (about 193 million cubic metres in 1998), to the growing chagrin of downstream neighbours. Under the Sophia Convention of 1994, Hungary has agreed to curb this pollution but the infrastructure required will cost about three billion dollars.

In their search for revenue, municipal governments are increasingly turning to privatization. Between 1994 and 1997, they sold 25 to 50 per cent of the shares of six of the more than 200 municipal water companies. These six companies supply water to about a quarter of the population nation-wide.

But judging by initial results, it will take some time before that investment translates into improved supply and treatment systems. In Budapest, for example, new revenues from the privatized system are supposed to cover not just operating costs but also repairs, notably, reconstruction of 10 per cent of the capital's 4,400 kilometres of pipeline each year. Yet only 30 kilometres of pipeline were fixed last year.

However, there is still a popular conviction that private managers are bound to do better than civil servants. Indeed, economic efficiency has improved in the capital over the last couple of years, since some of the water assets were bought by a Franco-German consortium for $91 million. The consortium manages the system, while the municipality retains control over key issues like water pricing.

Last year, the consortium managed to trim about $12 million from operating costs, essentially by restructuring and cutting jobs. The investors received 75 per cent of these savings. The remaining 25 per cent were used to keep prices as low as possible. Even so, last year's rates still rose more than 20 per cent against a consumer price index increase of 13 to 14 per cent. For this year, private investors originally proposed a 25 per cent increase which the local government rejected. Only after protracted negotiations did the two sides agree to a compromise of 13 per cent, slightly more than the predicted inflation rate.

The bottom line is clear: no one is satisfied. Private investors are faced with companies that continue to lose money, while municipal authorities fear the political costs from rising water prices. Meanwhile, ordinary citizens hold their noses over glasses of water that cost more each year.

RELATED ARTICLE: H2O, a formula for good health

Water consists of two atoms of hydrogen and one of oxygen. It also contains potassium, iron, sodium, calcium, magnesium and carbonates... and sometimes bubbles. The world market for bottled water, which is dominated by the multinational companies Nestle and Danone, is a fast-growing sector, with an annual consumption of 80,000 million litres.

The definition of mineral water accepted by FAO's Codex Alimentarius, which is used as an international yardstick, says that natural mineral water is Water directly extracted from the earth and bottled close to its source, with a stable composition and subject to as little processing as possible. This rules out water which is mineralized after extraction, water for medicinal purposes (which is often sold in chemists' shops) and water from the mains that is simply bottled.

The market for mineral water, which is synonymous with health and high quality of living, is also growing. According to figures provided by the specialized consultant Euromonitor, sales worldwide increased by some 25.5 per cent between 1993 and 1997, rising from 46,430 to 58,290 million litres.

In terms of consumption, the Italians and the French appear to be the peoples who are keenest on mineral water, since they consume more than 100 litres per person per year, twice the amount drunk by the Spanish (55 litres) and 20 times more than the Japanese (5 litres).

Mineral water is also trendy. It is used in the manufacture of cosmetics, and in some countries there are bars where only different kinds of mineral water are sold, as well as professional water-tasters whose job it is to appraise its qualities. By contrast, in many developing countries bottled water (often sold in large flagons) is a must, because of the poor quality of the mains water. The United Nations Development Programme's latest Human Development Report notes that if all the world's population had access to clean drinking water, two million lives a year would be saved.

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