N VIJAY JAGANNATHAN

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Does it have to be so? Certainly not, if we take China or even Cambodia as our comparator. Go to any Chinese town or village, and residents expect and get a tap that conveys water and not hissing air into their homes. Go to the city of Phnom Penh, and one can witness what dedicated managers of public water utilities can accomplish within five to seven years.

Bridging the Gap

On the basis of official figures, access to water supply and sanitation (WSS) infrastructure in Indian cities has increased significantly during the last 10 years. But all it takes is to Google to the Asian Water Utilities Databook published by the Asian Development Bank to realise that statistics reveal the truth. Our utilities are at the bottom of the class on most counts of accountability – gross overstaffing, unreliable services, heavy dependence on budget support and most important of all, the failure to provide universal 24/7 services in the homes of all urban residents, rich or poor alike. The message: dimensioning WSS infrastructure to provide substantial “average production” per capita water supply does not guarantee services to consumers anywhere near what other large metropolitan cities of east Asia are providing, let alone west Asia or South America. The average actually masks substantial leakages from the production plant to the hissing taps.

Let’s face it: the quality of the WSS service provided in Indian cities is an embarrassment for a country that is, in many eyes becoming a major participant in the global economy. Can Mumbai compete with Shanghai, if piped water is available a few hours per day, and that too with such inequity in coverage? Can WSS service be sustainably provided to the 15 million people living in Delhi by a bankrupt, overstaffed and unaccountable utility? Can Chennai compete with Singapore or Kuala Lumpur while hundreds of thousands of its residents rely on unhygienic tanker water or simply pray for good monsoons? I would think not.

Obviously, it doesn’t have to be so. Recently, the World Bank issued a reportIndia Water Supply and Sanitation: Bridging the Gap between Infrastructure and Service (the BTG report), and endorsed by the government of India. This report concluded that while “quasi-universal access” to WSS infrastructure may be feasible in the next 10 years or so – in terms of having a tap or latrine close enough to every home – if the current levels of public financing of investment are sustained, access to reliable, financially sustainable, environmentally sustainable and affordable WSS service is doubtful unless policies, institutional arrangements and incentives are thoroughly overhauled according to well accepted public finance principles

– public good investments financed from the exchequer and private good benefits by service users.

The Delhi experience with regard to trying to pilot a new approach has hit a road block, but provides some important lessons for not only water reformers, but also for anyone interested in ensuring that the successes of IT-led growth do not get whittled away by substandard basic urban infrastructure services in the country.

Applying Basic Principlesof Good Governance

Good governance is often characterised by accountability of public institutions to the community, and by inclusion of the entire community in the decision-making process. In the case of a basic service like water, as civic activists point out, providing universal access to safe water supply to all urban residents is a sine qua non of good governance. In situations where utilities are neither accountable to their principals (i e, governments), nor to users ofservices, there is clearly a need for policyremediation. Many developing countries – starting with Brazil and China – have set upon such a remediation policy decades ago by defining what the minimum standards of universal access should mean. These include 24/7 water supply consistent with WHO standards, and providing house connections to all homes, whenever there is a willingness to pay by home occupants.

The last of these criteria was initially resisted by many in Brazil because it meant connecting the hundreds of thousands in low income, illegal squatter settlements with a yard tap. The initial arguments of theBrazilian utility managers would sound familiar to Indians: slum dwellers won’t pay, it is dangerous to collect tariffs from slums, poor people are satisfied with a community tap, and so on. In 1991, the federal government launched a $ 100 million pilot programme to test these arguments through the PROSANEAR programme, one with which I had the privilege of being associated. We found in slum after slum great enthusiasm, particularly among women, for the convenience of a tap in the yard, and accompanying sanitation improvements. Based on the success of this initiative the Brazilians launched a massive programme to connect low income users with water and sanitation facilities in their homes, and through the process converting these persons as full-fledged duespaying members of the community. The imprint of a grizzled favela resident proudly holding his water bill as the first official recognition of his existence in the Rocinha favela of Rio de Janeiro is etched in my memory. The Brazilian utilities in the last 15 years have consequently become commercial entities as the cash flow from customers reduced their crippling dependency on government budgets (as we see in India).

Delhi Analogy

Improving the reliability, sustainability and affordability of the WSS service was the main concern of the government of

Economic and Political Weekly March 11, 2006 Delhi while conceiving a WSS project that has become the subject of fairly strong criticism by some groups since July 2005, including inEconomic and Political Weekly (‘Urban Water Supply: Reforming the Reformers’, December 31, 2005). These concerns could be valid if the Indian situation is different from those in other reforming developing countries. Perhaps if the politics behind reform led to some winners benefiting at the expense of several losers this could be a valid concern. The question is, do facts validate these concerns?

The Delhi Jal Board (DJB) manages a utility that, by the benchmarks of Asian capital city water utilities, scores at the bottom of the class in terms of efficient, accountable or reliable services. This is not surprising because the functions of policymaking, regulation, financing, ownership of assets, and operation of service are all concentrated in the hands of its board:

(i) the chairperson of the DJB is the chief minister; (ii) DJB sets and approves its tariffs; (iii) if tariffs are below operating costs, the Delhi government is always at hand to fill the deficit; (iv) tariffs being influenced by the highly political nature of DJB’s governance structure, are never sufficient to cover operating and maintenance (O&M) costs; (v) the agency is able to access substantial public funds to finance extension of its WSS infrastructure, rather than designing these investments in response to customer demand; and (vi) employees of DJB, who could comfortably fill a Delhi minibus to serve 1,000 house connections (as opposed to a lone employee in Singapore!), are not known to be particularly proactive if a pipe break disrupts services in entire neighbourhoods.

This depressing story is repeated in most metro cities in India – utility managers are not accountable to users for service quality, equity in service and least of all for efficiency. Further, every major uproar caused by service problems gets hastily patched through more subsidies, rather than fixing the organisation.

In order to improve the DJB’s “accountability framework”, the government of Delhi decided to take a step substantially more cautious than what other Asian governments did, but nonetheless an important first step for India. The idea was to unbundle the utility’s functions, and establish enforceable contracts between the various actors responsible for water production, distribution and retail. The process was a long-drawn one that started with the signing of a performance memorandum of understanding (PMoU) to outline: (i) a medium term financial recovery plan for DJB, based on improved accounting procedures, (ii) restructuring of DJB capital including the write-off of its huge debt, (iii) gradual recovery of O&M costs through regular adjustments of user charges, and

(iv) incentives for reducing O&M costs.

For improving the reliability of the WSS service and reducing the cost of its provision, the government of Delhi requested DJB to initiate the subcontracting in two initial zones of day-to-day technical and commercial operations to professional operators within the framework of management contracts (MCs). These MCs, which have been successfully implemented in several developing countries, attempt to pass on the risks of inefficient operations to private operators such that the operator is rewarded if preset efficiency indicators are met. Key to the process is defining clear performance indicators that the operator fulfils in order to achieve the contractual objectives of reliability of water services, compliance with national quality standards, upgrading services in the jhuggis and jhonpris, and achieving energy efficiency targets through better management of the electrical and mechanical equipment owned by the utility.

A management contract is one small but significant step to change the culture of inefficiency and lack of accountability. It is obviously not necessary in cities where utilities are accountable internally in terms of observing standard commercial practices, and externally to users of services. Singapore and Phnom Penh are two contrasting examples, where strong leadership has ensured very well run, accountable public utilities under very different economic circumstances.

Where these conditions are not met by the public sector, outsourcing in various forms to private operators is a policy option based on the premise that public-privatepartnerships (PPPs) rebalance the risks, and create incentives for reducing the burden of intermittent and poor services to hapless urban residents. DJB’s proposed project was not “privatisation” because the utility’s assets and revenue streams would continue to remain DJB property. Instead, the design has the potentials of inducting a culture of internal and external accountability among DJB staff.

Those who have very skilfully and efficiently attacked this component of the overall reform project proposed by the government of Delhi and DJB fail to mention that tariffs will not increase as a result of the PPP (as the government of Delhi will still be in charge of setting the pace at which O&M costs will be recovered from user charges). They also fail to mention that while DJB will be required to implement an energy efficiency programme, no staff redundancy plan is envisaged, despite the fact that energy and staff costs represent more than 45 per cent each of DJB O&M costs. Finally, they have neglected to point out that DJB and its consultants have included in the management contract special emphasis on improved service in slums, by linking part of the bonus paid to operators to achieving improved coverage in slums. Along with neglecting to mention these key points, these groups have been passing misinformation about privatisation, profiteering international companies, sixfold tariff increases, massive lay-off, and the purported anti-poor bias of the project.

Perhaps what is urgently needed is for a thorough analysis of available comparative benchmarked data from other developing country utilities by leading management and academic institutions in India, so that policy-makers realise just how mismanaged this vital urban infrastructure is in the country at the cost of urban residents and the national budget. This applies in

Benchmarking Performance

The inefficiency of India’s urban WSS sector comes at a very high cost to its economy and its competitiveness. A quick look at the Asian Utilities Databook will reveal that Delhi and other Indian metros are the few megacities not providing continuous (24/7) water supply. Two hundred and fifty litres per capita a day is “officially” available in Delhi. If such a large quantity is available how does one explain the hiss of air in many of Delhi’s taps? There is no snake charmer here: the depressing fact is that a lot of water never reaches the homes because of technical and commercial leaks in the system.

PPPs in WSS have existed since the beginning of the 20th century in Europe, and for several decades in developing countries. Sodeci, the private operator of Ivory Coast, created in 1958, has the best performance indicators among African WSS utilities, including the provision of safe and reliable services to low income communities. Africa has many other good experiences to learn from in Senegal, Niger, Zambia or South Africa.

In the Asian context, as considerably more of national expertise is available, PPP is usually led by local companies. I was personally responsible for the World Bank’s WSS programme in the Philippines for many years, including the period in the mid-1990s when president Ramos became fed up with the inefficiency of the Manila’s Metropolitan Waterworks and Sewerage System (MWSS), and decided to go for privatisation, with technical assistance from the International Finance Corporation.

The difficulties experienced by one of the Manila concessionaires had nothing to do with the types of allegations made by critics of privatisation in India, but rather because of a serious misjudgment of the foreign exchange risks by all bidders. The bids took place at a time when east Asia was riding an economic boom, but the day after the concessionaires took over the facilities the Philippine peso crashed, and the concessionaires were left with amortising loans denominated in foreign currency, while their cash flow was in pesos at half the value. This affected the services of Maynilad Water (MWSI), more than Manila Water, because of the structure of the deals. Despite these drawbacks there are many positive lessons, summarised in the table. Some highlights: (i) service connections have been increased by 1.8 million, of which 2,30,000 have been in low income neighbourhoods where earlier MWSS only provided public taps or residents relied on vended water; (ii) coverage has increased from 67 per cent to 91 per cent; and (iii) the two concessions no longer depend on the government for budget support, but support themselves by customers paying volumetric charges. The average tariffs in the table reflect cross subsidies that are provided to low income residents. In other words, users who consume more water pay proportionately higher block tariffs.

Today, one of the two Manila WSS concessions is in a position to export its know-how within 10 years after private operators took over a WSS operation as inefficient as that of Delhi. I currently work in west Asia, and here again, there are several models of working PPP, ranging from concessions to management contracts working successfully.

While there are many more examples of PPP successes in west Asia, western and eastern Europe and Latin America, there have been failures as well, mostly because the assignment of risks were not designed adequately. Typically, contracts failed because foreign exchange risks became much greater than anticipated; in other cases regulatory risks have played a similar role, and in others political risks ended up with governments reneging contractual terms. Some of them are linked to events that could not be mitigated (such as, major devaluation of the local currency as in the case of MWSI discussed above), some of them result from a poor performance of the operator, others from the incapacity of the owner to manage a PPP contract.

Protecting the poor is an obvious concern that needs to be addressed while drawing up a PPP, and several options are available, ranging from cross-subsidies as in Manila, to a minimum “free” water quantity for poor households (as in South Africa), to output-based aid in which poor households are given a free house connection (Cambodia). The point is that protecting the poor has to be a part of the design process; if this is done well the PPP can work, and when done poorly can fail.

Finally, I would like to mention that in most cases PPP has been initiated directly by governments, although many have requested assistance from the World Bank because of the need to learn from global experiences.

Recovering Full Cost

Well-run WSS service providers cover their costs, including O&M, depreciation, financing costs and contribution to the capital expenditure from user charges. A few Indian WSS utilities (Mumbai, Chennai) or in Bangladesh (Dhaka) already achieve full cost recovery; their current tariffs are not that much higher than that of Delhi. Well-run WSS service providers charge customers the cost of an “efficient” service. Achieving efficiency means that O&M costs are gradually reduced to compare with industry standards: metering and billing ratios of 100 per cent, non-revenue water of less than 20 per cent, collection ratios of more than 95 per cent, staffing ratios of 5 staff per 1,000 water connections or less, are not uncommon in developing countries. Also, as water infrastructure is highly capitalintensive, the balance between equity, subsidies and debt have to be adjusted to what the WSS operation can afford: obviously DJB will never be able to service its Rs 6,000 crore debt to the government of Delhi.

WSS tariffs need to be adjusted to two simple public finance principles: (i) Investments in “feeder” infrastructure, consisting of distribution and collection systems within neighbourhoods are in the nature of private benefits and should be fully recovered from users – typically water users, rich and poor alike want reliable, good quality services at their homes, and are willing to pay as long as services meet their expectations (just as they pay for cable TV and cell phones). This requires an extensive consultation and public information dissemination process. (ii) Investments in “trunk” infrastructure in water and sewage treatment, trunk collection and conveyance are more in the nature of public benefits, and could be recovered jointly from the community and the government.

PPP is feasible only when the private operator perceives the opportunity to generate a cash flow from improving efficiency. It therefore has the potential of being an instrument to bring about greater accountability, both internally within the utility and externally, with users of services. The key to its success is how fairly the contract has assigned risks between the operator, the DJB and the government. There will be no operator interest if the PPP process is politicised. If civil society is held hostage by poorly informed, but aggressive anti-reform campaigns the only winners will be the hissing taps and millions of dissatisfied customers. The poor unfortunately pay the highest price as a consequence.

EPW

Email: njagannathan@worldbank.org

Economic and Political Weekly March 11, 2006