Water supply and sanitation in Italy is characterized by mostly good services at prices that are lower than in other European countries with similar income levels. For example, the average monthly residential water and sewer bill in Italy is 20 Euro compared to 31 Euro in France. According to the OECD, water in Italy has been underpriced for a long time. With about 240 liter per day, per capita water use for residential uses in Italy is higher than in Spain or in France, where it is about 160 liter per day. Water resources in Italy are distributed unevenly, with more abundant resources in the North and scarcer resources in the South. Most water withdrawals are for agriculture and industry, with only 18 percent of water withdrawals made for drinking water supply. About one third of the water withdrawn for municipal supply is not billed to the customers because of leakage, malfunctioning water meters and water theft.
The relatively low water tariffs had been made possible by government subsidies for investments. However, because of high debt levels the government has been unable to sustain these subsidies, and investments thus have declined to a level that may make it hard to sustain service quality with an ageing infrastructure. It also makes it hard to improve service quality where necessary, such as in parts of Southern Italy where water supply is intermittent, or in areas where drinking water is naturally contaminated, such as in parts of Latium. The Italian government has embarked on a bold reform process of the Italian water sector by passing the Galli Law in 1993. The law aimed at consolidating municipal service providers into regional utilities, separating service provision from regulation, achieving cost recovery from tariffs, and improving efficiency. More than twenty years after the passing of the Galli Law, regional utilities have been created and regulation is in the hands of regional governments that are separate from the utilities. However, investment levels and efficiency still remain low, putting service quality at risk.
Modern history
Before 1994: A challenging situation
Before 1994, the Italian water and sanitation sector was highly fragmented with about 13,000 local water and sanitation service providers, often providing water and sewer services separately in the same locality. Municipalities were both service providers and regulators, creating a conflict of interest. Investments were typically financed through government subsidies, while recurrent costs of service provision were covered by tariff revenues. Tariffs were accordingly much lower than for example in France or in Germany. Furthermore, Italian utilities often provided and still do provide water at public fountains for free. However, because of high debt levels the government was less and less able to provide the subsidies to maintain the existing infrastructure and to improve service quality. The latter was particularly poor in Southern Italy where water supply was often intermittent. Furthermore, wastewater was often being discharged without treatment or with insufficient treatment. In order to comply with the EU Wastewater Directive of 1991, new expensive investments in wastewater treatment were necessary in addition to investments needed to maintain the ageing infrastructure. These investments were to be financed by the water service providers using their own resources instead of government subsidies. In order to make this possible, on the one hand tariffs were to be increased. On the other hand, service providers were to become more efficient, reducing recurrent costs and non-revenue water so that a higher share of their revenues would become available for investments to maintain and improve service quality. Investments in wastewater treatment and bulk water supply were to be planned in a more rational way within the boundaries of river basins. Furthermore, fragmented service provision by municipalities was to be consolidated in regional utilities that were expected to be more efficient. Each local government on its own would not give up the responsibility for water supply, and mayors were reluctant to increase water tariffs for fear of losing votes. Therefore, the national government prepared a law that would force municipalities to regroup themselves and form regional utilities, as well as to achieve cost recovery from tariff revenues. Under the planned law, regional governments would have an important role in setting the geographic boundaries of the new regional utilities.
Very few European countries have passed a water and sanitation services law at the national level. The planned law thus had only one precedent in Europe, and that precedent happened two decades earlier: In England and Wales municipal water and sanitation services were regrouped into ten Regional Water Authorities established along river basin boundaries through the Water Act of 1973. In the Netherlands the number of water service providers had been consolidated over a period of four decades into ten regional water companies, but this evolution was gradual and was not triggered by a law. In other European countries such as in Spain, France, Germany or Austria the water sector remained highly fragmented without any intervention by the national government into how water and sanitation services were organized at the local level. Therefore, the Italian approach to reorganize and modernize a local service such as water supply and sanitation through a law at the national level was quite bold and almost unprecedented.
The Galli Law of 1994: An attempt to modernize the water sector
After ten years of producing and discussing various bills, in December 1993, under the government of Prime Minister Carlo Azeglio Ciampi (April 1993-May 1994), the Italian Parliament passed the Galli Law (L.36/94) named after the Parliamentarian who spearheaded the law. The short-lived Ciampi government that passed the law was a coalition government consisting of technocrats. At a time of rapidly changing governments, corruption scandals, political fragmentation and high levels of government debt, the Galli Law was one of several laws passed as part of important economic and political reforms in Italy at the time.
The aim of the law was to modernize water supply and sanitation in Italy. The law had three specific aims: it set full cost recovery from tariff revenues as a goal, something that was already the norm at that time in advanced EU countries such as France, Germany and England. It also included a controversial obligation that the remuneration of capital, including of public capital, should be included in the calculation of tariffs. it aimed at creating regional utilities, overcoming the fragmentation of the sector into thousands of service providers. Somewhat oddly, the new utilities were to be regulated by one newly established regional water authority for each new regional utility. it allowed the privatization of regional utilities through concesions as an option. it separated regulatory functions from service provision. it aimed at integrating water supply and sanitation utilities that had often been functionally separated, into single utilities.
To implement the law Italy's 20 regional governments were required to define “Optimal Service Areas” (Ambiti territoriali ottimali, ATO) that would be covered by the new regional utilities. Each ATO would comprise a group of municipalities. In each one, an authority called AATO was to be created that would set tariffs, establish an investment plan as well as a business plan, and award a concession to one public or private service provider. The AATO would monitor and regulate a single service provider in its area. The Galli Law thus, for the first time, introduced clear policies for water supply and sanitation in Italy at the national level. However, it was based on a technocratic vision that was in many respects at odds with the Italian reality.
Implementing the Law: Delays and regional differences Only four months after the Galli Law had been passed, the government changed and Silvio Berlusconi was elected Prime Minister for the first time for a short period. The rapid succession of governments thereafter led to a first delay in the implementation of the law. Only when during the 1996-2001 period three centre-left governments from the Olive Tree Coalition ruled Italy, implementation of the law picked up. For example, during this time a method to calculate water tariffs, the Metodo Tariffario Normalizzato (MTN), was specified through a decree in 1996. It fixed a standard of 7% for capital remuneration, a level that may have been appropriate at that time before the introduction of the Euro and falling interest rates. However, that rate was never updated after the introduction of the Euro in 1999, and its high level contributed to make the capital remuneration clause of the law unpopular among those that were primarily concerned with keeping tariffs affordable.
Until 1999 all but one of the regional governments had passed legislation to create ATOs, in compliance with the Galli Law. However, only about half the ATOs had actually been created by then. The AATOs then were supposed to award concessions. This could be done through tenders, but also directly to private companies or even to the existing or newly created public utilities. Some also sold parts of the shares in their local utilities. Ultimately none of the regional utilities was fully privatized. While many of the 91 regional utilities remained entirely public, many were partially privatized. For example, in Rome the regional company Acea, the largest in Italy, was partially privatized in 1999. The companies that entered the market were mostly foreign, such as Suez Environnement, Veolia Environnement and Saur from France as well as Thames Water from Britain. The implementation of the law varied from one area of Italy to another. In the North, there are strong municipal utilities and a tradition of local government. The creation of regional authorities thus faced resistance there. In some Northern regions, the law was not implemented for a long time, keeping municipal utilities in place. In the Centre and the South, the Galli Law was implemented faster than in the North.
Furthermore, the implementation of the Galli Law diverged from the original plan. For example, the boundaries of ATOs were supposed to be drawn based on various criteria including river basin boundaries, in line with the principles of integrated water resources management. However, in reality most boundaries of utilities were drawn along administrative boundaries.
The 2000s: More privatization attempts The second government of Silvio Berlusconi (2001-2006) tried to give a second push to private sector participation. In 2001, it introduced norms that forced municipalities to award concessions to private companies, abolishing the direct award of concessions to public companies. However, faced with opposition, the norms were revised to allow direct “in-house” awards if it could be demonstrated that in-house provision was more efficient than a concession, or if utilities sold a majority share in their existing utilities. In the meantime, the foreign private companies that had entered the Italian water market in the late 1990s faced difficulties: "Foreign players including Thames Water and Saur attempted to enter the Italian market only to become embroiled in never-ending political, regulatory and legal wrangles".Global Water Intelligence: A brighter future for Italian water utilities, February 2015 For example, in Arezzo, three years after the contract had been awarded in 1999, the local government asked a subsidiary of the French water company Suez to reduce its management fee because the planned financing had not been mobilized. After lengthy confrontations, the local government and the company agreed to postpone needed investments.