The Estonian water sector is facing a situation where European Union (EU) subsidies are decreasing, but to continue providing high-quality water and sewerage as a vital service, the sector still requires substantial investments. The Water Services Steering Group convened by the Ministry of Climate is determining how to reorganise the Estonian water sector. The roadmap is due to be completed in the second half of 2025 and the European Commission’s Directorate-General for Structural Reform Support provides technical assistance in implementing the project. One key issue in this process is the consolidation and efficiency improvement of the fragmented water supply and sewerage sector. The ability of a large number of water undertakings to make continued investments without EU subsidies is limited, as is finding qualified labour for the maintenance of modern equipment. One solution could be the merger of smaller water undertakings with larger ones in more densely populated areas.
Today, over 130 water undertakings operate in Estonia, most of them micro-enterprises, with varying efficiency indicators (such as water loss in pipelines). In Croatia, which is 25% larger in area and three times larger in population than Estonia, where currently about 200 water undertakings operate, there is a plan to reduce the number of water undertakings to 41. The purpose of this is to increase efficiency and to ensure that the consumers continue to receive water services of good quality at a reasonable price in the future.
In Estonia, water pricing is regulated under the Public Water Supply and Sewerage Act, which states that the price must cover justified expenses and ensure a justified rate of profitability on the invested assets of the undertaking. The basic principles for calculating water service prices are similar to those of other regulated services in Estonia, such as heating and the electricity network. Investments and their cost are one important component of pricing. This is where the state as a provider of subsidies and local governments come into play, approving and monitoring the compliance of water undertakings’ investments with the development plans for public water supply and sewerage. Under the current regulation, investments made from European subsidies are not considered in the pricing of services in either the energy or water sectors. A similar principle is used in other EU countries, such as Latvia, Lithuania and Croatia.
The Estonian water sector needs to be reorganised to ensure sustainability. However, in the midst of reforms, the consumer must not be forgotten. The objectives and outcomes of the water reform must primarily serve the interests of consumers, ensuring that the quality of drinking water remains good and water prices reasonable in the future. Currently, the water price in Estonia is below two percent of household income. The OECD estimates that a reasonable water price could range between three to five percent of a household member’s income. The threshold of five percent, which would financially mean a water price of 21 €/m3 , would be nearly five times higher than today’s average. Such a significant price increase, if considered in Estonia, must be very well justified, and if reorganising the sector can avoid or significantly mitigate this, then all market participants, as well as policymakers, should strive 8 towards that goal. The Competition Authority is a partner in this journey for all undertakings operating in the sector, local governments and the Ministry. For example, the pricing methodology can implement incentive factors for water undertakings that contribute to achieving cost-effectiveness.