Services in Disrepair While the challenge in most of the developing world is to expand infrastructure and service delivery, East European and Central Asian countries are struggling to prevent the existing energy systems from failing. The socialist legacy left a power infrastructure that was equitable but extremely inefficient. Within centrally planned Communist systems, energy was traded at no or low cost. Public buildings in the region use much more heat compared to similar buildings in West European countries, but current governments can't afford to continue subsidizing the utilities. So over the last decade, the region started experiencing problems in delivering heat as energy prices rose and the infrastructure deteriorated. The region is the least energy efficient in the world in GDP per unit of energy used, although there has been a 35% increase in efficiency since 1992, according to Meeting the Environment Millennium Development Goal report. But another 74% increase is needed for the region to reach the same energy efficiency as countries at similar levels of development. The challenge today is dual: to modernize the utilities systems to improve efficiency and to decentralize the systems to make these economically sustainable. "There is a need to look for a different model, namely to commercialize the industries," explains David Kennedy, a World Bank Senior Energy Economist in the Europe and Central Asia region. Reforming Systems - and Attitudes Utilities used to be part of government departments (except in the countries of former Yugoslavia), and were operated as monolithic enterprises according to engineering principles, not business ones. "The heating systems were designed to be very reliable and had very few valves and knobs to turn, so they couldn't break down," says Julian Lampietti, a World Bank Senior Economist in the Europe and Central Asia region. "There was a view that everyone should be given 18°C for 90 days a year." But soon it became obvious that people didn't want that much heat if they were required to pay its full cost. Decentralizing and commercializing energy systems will allow people to control and consume as much heat as they want. The systems will need to be redesigned to handle a lower capacity, be more flexible and more on-demand, rather than be based on an engineering objective of 18°C, Lampietti explains. Restructuring utilities, however, implies raising prices for consumers, who may be reluctant to start paying for the services they used to get for free. Because of the hardships experienced during these transition years, "there is a very strong mentality in a lot of these countries that the government owes them something," says Lampietti. "People are very reticent to suddenly have to pay for something that they've always gotten for free or for very little. Suddenly someone comes in and says 'you have to pay for it,' and they didn't give you your salary and the money you had in your bank account disappeared. So, you're not going to pay for it." Unhealthy Alternatives Rising energy costs and service disruption may be influencing the behavior poor people the most. In some cases, they are turning to less expensive fuels such as coal and wood to keep warm. But burning these dirty fuels isn't suitable for those living in densely populated urban areas. "If you start consuming wood or coal in a high-rise building that was never designed for that type of fuel, you start creating all sorts of problems, reaching all the way to deforestation in rural areas to indoor pollution in your apartment because there is no venting system," says Lampietti. Long-term Goal: Restructuring the Power Sector Breaking down the power sector into smaller decentralized enterprises will take many years and requires investment. But the private sector isn't developed enough and it could be years before foreign investors come in because many countries don't have adequate regulatory frameworks in place. Some Central European countries -- Hungary, the Czech Republic, Poland - have witnessed progress in commercialization and regulation, though it's too early to tell whether privatization will yield the anticipated results. "You can't privatize overnight and expect it to work. It needs to be done in a series of steps," Kennedy says. "Outside of accession and a couple of pre-accession countries [to the European Union], there is likely to be a very limited privatization in the region in the next five years," he adds. This means that international financial institutions, such as the World Bank or the European Bank for Reconstruction and Development, need to step in for an interim period of five years or more. The Bank, in conjunction with other international organizations, has developed a series of policies intended to guide the work in the energy sector. The policies focus on de-monopolization and regulation, prices and fiscal policy, foreign trade, investment policy, and social and environmental protection. “The Bank is keen to improve the delivery in these countries,” explains Anil Markandya, World Bank Lead Specialist in the Environment & Socially Sustainable Development Unit, who worked on Meeting the Environment Millennium Development Goal report. But as the countries move toward creating self-financing energy delivery systems, “we have to recognize that many households will have a serious problem of affordability,” he adds. To help people adjust to these changes, the Bank is designing solutions to provide social safety nets for the poorest. A project in Pamir, Tajikistan, an impoverished region left with no electricity after the Soviet Union dissolved, is an example of this approach. A private company restored a broken hydropower system in the region with the help of a special fund established by the Bank and the Swiss government. The fund ensured the supplier would recover his costs, while allowing the price to be staggered so that poor households wouldn’t pay the full cost of electricity. “It’s a subsidy that is intended to be phased out ten years,” Markandya explains. Similar schemes with a degree of social protection for poor households are being considered in other countries as well. The Bank currently works on more than 30 projects in the infrastructure and energy sector across the region. It has even helped improve the heating system in Valeriu's school through the Moldova Social Investment Fund. And in Kyiv, Ukraine, the Bank facilitated the modernization of metering systems and the installation of thermal insulation in more than a thousand buildings, including schools and hospitals. Diversifying Energy Choices The Bank, which plans to release a study on the region's infrastructure over the last 10-15 years in June, is working on the creation of a Southeast Europe energy market set to open in 2006. As the need for regional energy markets becomes more apparent, the Bank's work also supports cooperative efforts by neighboring countries to diversify their energy choices. "There is a lack of power alternatives for heating in certain countries. Electricity is the main way of heating in urban areas in the Balkans, for example. There is a need to give people an opportunity to diversify their heat supply by building gas lines," says Kennedy. While EU energy market is helpful to succession countries, there is scope for improvement in regional cooperation both in Central Asia and in the Caucuses. Designed as integrated energy systems, the two haven't operated as integrated energy systems in the post-communist area, leaving many out in the cold. Other Utilities Other utilities, including water, waste water treatment and sanitation, are experiencing similar difficulties. These services used to be subsidized by the state and delivered by centrally-managed utilities. But after 1991, many countries cut sharply central government subsidies and, without resources for maintenance, the existing infrastructure deteriorated. The protection of water sources also has weakened, says Markandya, explaining that water catch areas used to be better protected. To restore the systems won't be easy. The cost of water needs to be assessed, and the management of water and sewerage facilities needs to be reformed. But "a lot of people won't be able to afford [higher water prices]," he adds. While some rural areas still lack adequate access to sanitation, the main problem is that the pipelines are deteriorating. Repairs are necessary, especially in some Central Asian countries, where water supply contamination has caused outbreaks of typhoid and other water borne diseases. While the situation is not an epidemic, the frequency of these outbreaks is increasing. "There is a health problem associated with it," says Markandya. Access to sanitation is most problematic in Albania, Romania and CIS countries. In Kazakhstan, about 33% of the mid-sized and large sewage treatment systems and 26% of smaller towns don't meet basic maintenance standards. In Ukraine, about 23% of the pipelines need to be repaired and 25% of sewage treatment systems need to be rehabilitated. In Moldova, most of the sewage system was designed for a 20-year life, which it has exceeded. Approximately 100 km of the network needs to be replaced and most equipment needs to be repaired. | 
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