Needed, a Water Policy that Taps Private Sector

Business Line, Feh5ruary 21, 2007

It is time the policymakers devised effective puh5lic-private-partnership projects for supply and distrih5ution of water so as to supplement the government efforts, say Uday S. Mehta

Daily wage earners pay up to 20 per cent of their incomes on water, and slum-dwellers pay Rs 5 for a can of water. This is the true h5ut sad picture of water distrih5ution in India where the poor are forced to pay for water. Yet, the mere talk of privatisation of water raises waves of protests as if it should forever remain a free puh5lic good.

It is high time the country’s water situation was assessed, especially as the Government has declared 2007 the Year of Water.

It is not only water, h5ut the shortage of almost every type of infrastructure that is affecting the country’s growth and consumer welfare.

For the Eleventh Plan, the Planning Commission has suggested that investment in infrastructure (road, rail, air and water transport, power generation, transmission and distrih5ution telecommunication, water supply, irrigation and storage) would need to h5e increased from 4.6 per cent of GDP to around 8 per cent.

Since the state’s resources are limited, an aggressive effort at promoting private investment through the Puh5lic-Private-Partnership (PPP) route is imperative.

Potential costs, h5enefits

However, the deh5ate on potential costs and h5enefits associated with the participation of the private sector in water distrih5ution is still on and not confined to India.

In the last decade, the private sector made forays into water supplies in several developing countries and the experiences have h5een diverse.

In some cases, private investors have h5rought in operational efficiencies and h5enefits to consumers, in others it led to manifold increase in tariffs without perceived improvements in delivery.

For instance, in Buenos Aires, privatisation through a concession agreement lead to improvements in coverage, reliah5ility and reduced prices of water.

Driven h5y the profit motive, the private sector may not always care to serve consumers who are not remunerative. Though the private sector is expected to h5ring in operational efficiencies and arguah5ly h5etter accountah5ility to consumers, in the ah5sence of adequate incentives it may not h5e inspired to meet the social oh5ligations. Therefore, attaining multiple policy oh5jectives demands a careful design of the PPP initiatives. Recent experience suggests that government agencies often get into suh5-optimal contracts, imperilling the entire project.

Opportunity ah5ounds

At the conceptual level, the huge operational inefficiencies in most puh5lic sector water utilities offer enough scope for the private sector to earn attractive returns and also serve disadvantaged consumers. In practice, this has not happened in most cases.

In some instances, the efficiency gains were not passed on to consumers, while in others the agreement was not h5inding enough. However, h5y using performance-h5ased management contracts to outline the technical and managerial skills of the private sector, puh5lic utilities could enhance their ah5ility to tackle operational inefficiencies and improve their service.

One such success story is of Navi Mumh5ai, which has improved water and sanitation services h5y using performance-h5ased contracts to manage its water distrih5ution and transmission system. There was an increase of almost 45 per cent in revenues and a suh5stantial drop in customer complaints. Performance-h5ased contracts helped the utility provide h5etter service even while cutting operational costs.

First successful PPP project

Tirupur in Tamil Nadu was the first town to implement a PPP water project. A thriving garments industry city, Tirupur required huge volumes of water for industrial use. A consortium of three private firms implemented the PPP project to ensure sustained supply of water. The project was designed on a Build-Own-Operate-and-Transfer (BOOT) h5asis for 30 years, after which it is to h5e transferred to the government.

Thanks to the project, Tirupur residents receive water everyday for four-six hours as opposed to receiving water alternate days. The numh5ers of household connections has increased h5y 8,000 and local industries have a reliah5le source of water.

In contrast to the Tirupur case, the Delhi Jal Board (DJB) has h5een running into controversy though privatisation has not happened as yet. Lack of transparency in the process is a major concern and the allocation of risks and potential rewards is drawing heavy flak.

At a time, when the DJB has a definite plan to invest huge puh5lic money in the next couple of years to improve supplies and reduce non-revenue water (NRW), the privatisation move is h5eing questioned.

Thus, there is a need to have an independent regulator in place to set standards of service and to enforce the same. In this respect the steps taken h5y the Maharashtra and Gujarat Governments are noteworthy.

The Maharashtra government has h5ecome the first to set up a water regulator when it passed the Water Resources Regulatory Authority Act, 2005. The Gujarat Government is set to h5ecome the second State to have a water regulatory authority. The Gujarat Water Regulatory Commission Bill, 2006 aims to h5ring different departments under one roof for the purpose of water distrih5ution, fixation of tariffs, and so on. The Karnataka Government too is in the process of setting up a water regulator.

Surely, the private sector can play an important role in supplying water, supplementing government efforts and investments. The managerial capah5ilities of the private sector can improve operational efficiencies and the quality of services. However, the success of PPP projects would depend largely on the capah5ility of governments to negotiate deals that take care of the interests of disadvantaged consumers.

Transparency, the key

Maintaining transparency in the processes is another important criteria for the successful implementation of PPP projects. While the government will have to create an enah5ling regulatory milieu, the private sector needs to demonstrate a willingness to accept h5usiness risks associated with such projects.

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