While there have been improvements in the quality of drinking water in Eastern Europe, concerns remain regarding pollution and old pipes and treatment equipment. Mark Rowe examines the problems this creates for major water users in the drinks industry such as brewers, juice manufacturers and bottled water companies and the prospects for improvements in standards.

There is no doubt that water quality in eastern Europe has improved immeasurably since the break-up of the Soviet Union and its related satellite states, a process reinforced by the wholesale privatisation now taking place. But while standards have improved, concerns about pollution, old pipes and outdated treatment works are likely to continue.

For companies investing in the region, from fruit juice to bottled water manufacturers and brewers, the mixed quality of tap water is a concern, because the necessary water treatment for water supplies adds costs to the bottom line.

The challenge is significant. The United Nations Economic Commission for Europe (UNECE) earlier this year declared that one in seven Europeans - 120m people - have no access to safe drinking water, the vast majority in eastern Europe. In Romania, for instance, only 16% of the rural population have access to safe water. High-profile cases of pollution abound. Earlier this year, arsenic was detected in groundwater in the Serbian northern province of Vojvodina. The town of Zrenjanin reacted by banning tap water, after which bottled water sold out.

"There are parts of Romania and Hungary where the water is highly mineralised," said Stuart Banham, operations consulting manager for Zenith International. "That does cause problems for companies and they will face extra costs in stripping out the mineralisation."

Other analysts put the cost of the overheads incurred at cleaning up tap water at anywhere between below 1% and 8% of the turnover of any given factory, depending on the size of the company and the extent to which it has any existing water purification infrastructure.

"There is no question that in some places we have to make sure the water is brought up to standard in our factories," said Francois Perroud of Nestlé. Whether or not these costs match those incurred in western Europe depends of course on the quality of the raw drinking water material they use.

"Even in the UK, companies have to have treatment plants to remove chlorine and other agents. The bigger brewers will tend to have their own boreholes and wells, where the quality varies less than mains water," said Banham.

In eastern Europe, where environmental standards are still, despite recent improvements, often significantly poorer than in the west, privatisation is widely seen as the key to cleaning up drinking water, attracting injections of public investment to get these services in shape for a sale. Estonia, for example, is sinking millions of euros into both drinking water and sewage services, with European Bank for Reconstruction and Development (EBRD) loans used to finance sewage works, while Latvia is also benefiting from EBRD funding for new water and sewage works in Riga. In Lithuania, a water treatment plant for Vilnius in Lithuania has been built using EBRD loans - it is intended that Vilnius' water supply services will be privatised on a concession basis.

Meanwhile, in Bulgaria the government is pressing ahead with a programme of corporatising all water entities; both the World Bank and the EBRD are investing heavily in both water and sewage projects in the country. The EBRD funded the initial privatisation programme for the water and sewerage of the city of Sofia, which was sold off as a 25-year concession last year.

However, experts believe that it will take decades for Bulgaria to address its water infrastructure shortfalls. That said its bottled water industry remains potentially lucrative, creating tension in a poor country where business success can spark intense jealousy; this autumn a bomb in Sofia exploded near the apartment of the owner of Bulgaria's leading mineral water producer Gorna Banya Bottling Company. Police blamed a commercial dispute.

Meanwhile, the imminent privatisation of Prague Water will mean all urban water and sewerage services in the Czech Republic will be in private hands, although significant shares will remain in the hands of the relevant municipalities. EU compliance related work on sewerage and treating industrial waste will require an investment exceeding US$3.5 billion, however.

Hungary's water sector privatisation is currently carried out on a concession basis. However, the municipalities tend to regard water and sewerage facilities as a non-profit activity; according to UK government Trade and Investment officials, "injecting a note of commercial realism into the process is proving difficult."

Poland faces among the most daunting environmental challenge of all Eastern European countries: it is estimated that some US$6 billion will have to be spent on upgrading the water and wastewater system before it will be able to meet EU requirements.

Romania also faces significant difficulties. The EBRD and the International Finance Corporation (IFC) have overseen the privatisation of Bucharest's water services and are continuing to fund the programme in secondary cities. But in the rural areas of Transylvania and Moldova in the east of the country there is little coverage of piped water and sewage treatment. The estimated cost for achieving universal coverage of water and sanitation in Romania is around US$1 billion over the next 10 years.