Tuesday, June 19, 2012

A Consumer-Oriented Approach to Water Sector Reform (WSR)

With complex institutional arrangements, aging infrastructure, and poor cost recovery practices, India’s urban Water and Sanitation Services (WSS) sector faces tremendous challenges to providing safe, affordable water in a reliable manner. Ill-suited to tackle these issues on its own, the government began turning to the private sector for solutions in the mid-1990s. While such Public Private Partnerships (PPPs) were introduced with great fanfare, they failed miserably – only 1 in 5 projects initiated during the period remain in operation. One of the most important reasons behind these failures was the unilateral focus on physical infrastructure, completely neglecting the consumer-facing component of water utilities.

India has learned much from its Water Sector Reform (WSR) experiences since then, with three quarters of PPPs henceforth involving Operations and Management (O&M) of the distribution value chain. Correspondingly, PPP failure rates have decreased substantially: 80% (1990s) à 62.5% (2000-2004) à nearly zero (2005 onwards). In this blog, we will outline India’s most critical urban WSS issues from a consumer-oriented approach – the approach that has proven successful in providing lifelines to a sector in dire need of revitalization. (Source: Trends in Private Sector Participation in the India Water SectorWorld Sanitation Program 2011) 

To summarize this sector’s main challenges in one sentence (or diagram, rather), it is stuck in the following low-level equilibrium trap:

In almost every component, India ranks amongst the world’s worst – even amongst developing countries. The following statistics illustrate this situation, with occasional Key Performance Indicators (KPIs) contrasting India’s performance with countries of relatively comparable size and development status. (Source: Trends in Private Sector Participation in the India Water Sector, World Sanitation Program 2011, Report on Indian Urban Infrastructure and ServicesMinistry of Urban Development 2011, Bringing Water to Your DoorstepsPricewaterHouse Coopers 2011)

Low Service Levels
Official estimates show that urban water coverage is available for 9 in 10 urban households (including usage of public handpumps), but beneath this penetration rate are numerous indicators regarding poor access quality and low supply reliability.  Urban water coverage stands at 64% – including both individual connections and public stand-posts – compared with 91% for China and 80% for Brazil. Supply duration ranges from 1-6 hours/day, compared with 24 hrs/day for China and Brazil. Most cities lack metering for residential water connections, and customer service is often lacking as well.

Low Willingness to Pay
Water utilities only generate revenues from a certain portion of water supplied, with the rest being classified as Non-Revenue Water (NRW), which consists of three categories: authorized unbilled usage, real losses (technical reasons), and apparent losses (unauthorized unbilled usage such as theft). Data reliability for NRW is low in India because many cities do not even meter their water supply (this KPI’s denominator), but estimates show that apparent losses account for a substantial portion of India’s NRW, which comprises 74% of all water produced. Beyond apparent losses, low willingness to pay is also marked by the migration of commercial and industry entities from public connection to private sources due to their dissatisfaction with service levels, as well as excessively higher tariffs intended to cross-subsidize lower-paying segments.

Low Tariff and Cost Recovery
Water utilities in India typically recover only 30-35% of their O&M costs, despite the specifically stated objective of 100% O&M cost recovery from India’s National Water Policy. Most of water tariff’s components – water taxes, water charges, connection charges, and water pricing in particular – can be optimized through quantitatively reassessments, but it is the collection of these charges that is in most dire need of fixation. 
The numbers are striking: Only 26% of all water production is billed (the remaining 74% being NRW) – and just 18% of billed water is metered! Furthermore, over one-fifth of billed charges are not actually collected:

Low Level of Investment
The public sector has long been strapped for cash to make substantial WSS investments, and the private sector has so remained reluctant to bring its own cash to the table after the 1990s high-profile failures involving 100% private investments in huge capital expenditure projects. Amongst all public utilities in, WSS investments account for just 4% of private investments by project value, and 16% by number of projects. Underlying the perceptions of low returns and high risk is the heated public-good-economic-good debate. On one hand, the United Nations has consecrated water as a public good wherein access is a universal human right. On the other hand, the necessity of sustainable resource management and attraction of private investment forces water to be commoditized as an economic good, as recognized by India’s National Water Policy.

Now that we have outlined India’s most critical WSR reform issues, our next blog will focus on their respective solutions. Once again, our primary focus will be on the distribution value chain segment with a consumer-oriented approach.

Post by Clarke Hung, The Wharton School, Summer Intern at pManifold

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