The Hindu Business Line : Do we really need a water regulator?

THE non-commercial approach of the provision of water services over the years has seen the sector caught in a vicious circle. The low level of investment has deteriorated the service levels which, in turn, have created the lack of willingness to pay for it and, hence, the lack of funds for further investments. In addition, there has been a significant drying up of public funds for utility services, in general, and water services, in particular. As a result, there has been a dire necessity to look for alternative methods of financing capital investments in the sector.

Alternative sources of funds, particularly private investments, have, however, remained negligible in the absence of adequate policy support towards private participation. Moreover, in recent years, it has been often claimed that the absence of a regulator in the sector has made it run in a vacuum. A second school of thought, however, questions the need of a regulator in the sector. This is justified on the ground that it would be against the essence of decentralisation as it is the third-tier of governments that are the major providers of water services.

The question is: Why do we need a regulator for the sector? Is it because there is a need for privatising the water utility services; that there is a need for a shift in the pattern of asset ownership in the water sector? Or, is it required for the betterment of service level even with the existing structure of provision of water services? The myth dies hard that regulation is a pre-requisite for privatisation of utility services.

Moreover, regulation is considered to be a set of negative rules for monitoring and policing the activities of private operators. However, the water sector in India does not permit private participation, particularly for capital investment purposes. In such a situation, what could be the possible role of a water regulator.

Basically, it is an independent framework/a set of rules outside the system of governance as well as beyond the influence of stakeholders to strike a balance between consumers' interests and those of the service providers. Even if there is no possibility of a significant change in the ownership pattern of the water utility assets, regulation is a necessity, if not sufficient, to ensure efficient and cost-effective service provision. Moreover, it is also required to ensure a level of investment that takes care of the ever-increasing demand for water services.

How is water regulation different?

Initiatives towards creating a water regulator have remained limited due to certain characteristic feature of the water industry in India.

Maharashtra and Gujarat are two major States to come up with some sort of a framework for creating a regulator in the sector. The multiple policy objectives of economic efficiency, environmental protection, public health issues, guaranteed access to all sections, affordability of tariff for domestic consumers, cross-subsidisation of economically-weaker sections, adequate and reliable supplies to industries creates problem for establishing a regulatory framework for water sector in India. Moreover, the broader fiscal and political goals have further contributed towards this end. Over and above, unlike power and telecom where the associated risks between projects are quite similar in nature, each separate water and sanitation project has its own nature of risks.

This variation is mainly due to the fact that the institutional framework and organisational structure for the provision of water and sanitation services vary significantly among, and even within, States and cities. Moreover, the responsibility of the various facets of water and sanitation services remains divided among various levels of the government — Central, State and local.

Issues to be addressed

While it is essential to develop a proper regulatory framework for the water and sanitation sector in India, one needs to be focussed as to what should be the contour of the water regulator keeping in view the structure of water industry in India.

The regulatory framework at the first instance needs to address the tasks that the envisaged water regulator is supposed to perform. To be specific, the basic requirement for the water and sanitation sector at the moment is to separate the functions of policy formulation, provision of services and regulatory activities. The regulatory framework needs to address the following issues:

A proper institutional arrangement and bringing clarity in the roles of various levels of government in the sector;

Productivity improvement in the sector and subsequent consumers' satisfaction;

Cost aspects in segregation of activities usually characterised by natural monopolistic nature;

The necessary/corresponding changes in the regulatory framework as and when the reforms are undertaken in the sector;

The form of private sector involvement, keeping in view the varied institutional arrangement for the provision of these services;

The nature of possible competition and market structure keeping in view the existing system of provision of water services.

Structure of the regulatory authority

Unlike telecom and power, where the provision of the service is absolutely within the jurisdiction of the Central and State governments respectively, the water services lack a distinctly clarified structure for its provision, and often with overlapping jurisdiction of the State and local government.

As a consequence, the major issue that needs to be addressed for the regulatory authority is at what level this needs to be constituted — Central, State or local. Often, a regulator is argued to be constituted at the local level, as a decentralised regulation is expected to be more responsive to the local needs and conditions. Moreover, it eases monitoring and ensures better access to information. However, the arguments against this are:

It increases regulatory costs through replication of regulatory agencies;

Reduces regulatory effectiveness because of lack of capacity;

Increases the danger of "regulatory capture" by the private operator;

Allows local interests to neglect the external costs of their actions;

Can reduce the potential for comparative competition.

In addition to the level at which a regulator needs to be constituted for the water and sanitation sector while developing a structure for it, the independence of the body needs to be considered. A complete political and financial independence of the regulatory body to check the government using regulator's authority to arbitrarily interfere in management and investment decisions of the private operator. A regulatory body also needs to be commercially independent to prevent "regulatory capture" by the private operator.

Moreover, the head of the regulatory body and other members should have an independent recruitment mechanism outside the system of governance. Further, the regulatory decisions are liable to be changed only by an amendment of the existing legislation or by a judgement of the court of law. It is in this regard that the constitution as well as other aspects of a regulatory authority for the water and sanitation sector in India has to be guided by a separate Act developed for the purpose. However, in spite of a completely independent and autonomous character of the regulatory body, it has to be under some sort of control to ensure quality service and avoid any drastic measure.

Also, the regulatory authority should not lack attention towards competitive issues and should take initiatives towards developing investors' confidence to invest in the sector. Moreover, the members should have a clear idea of the sector, its structure, associated problems and related issues. Finally, the authority needs to present a picture of integrity among itself to create a relaxed atmosphere.

(The author is a senior analyst with ICRA Advisory Services.)

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