The Hindu Business Line : Needed, a water policy that taps private sector

It is time the policymakers devised effective public-private-partnership projects for supply and distribution of water so as to supplement the government efforts.

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 but sad picture of water distribution 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 public 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, but 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 distribution telecommunication, water supply, irrigation and storage) would need to be 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 Public-Private-Partnership (PPP) route is imperative.

Potential costs, benefits

However, the debate on potential costs and benefits associated with the participation of the private sector in water distribution 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 been diverse.

In some cases, private investors have brought in operational efficiencies and benefits 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, reliability and reduced prices of water.

Driven by the profit motive, the private sector may not always care to serve consumers who are not remunerative. Though the private sector is expected to bring in operational efficiencies and arguably better accountability to consumers, in the absence of adequate incentives it may not be inspired to meet the social obligations. Therefore, attaining multiple policy objectives demands a careful design of the PPP initiatives. Recent experience suggests that government agencies often get into sub-optimal contracts, imperilling the entire project.

Opportunity abounds

At the conceptual level, the huge operational inefficiencies in most public 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 binding enough. However, by using performance-based management contracts to outline the technical and managerial skills of the private sector, public utilities could enhance their ability to tackle operational inefficiencies and improve their service.

One such success story is of Navi Mumbai, which has improved water and sanitation services by using performance-based contracts to manage its water distribution and transmission system. There was an increase of almost 45 per cent in revenues and a substantial drop in customer complaints. Performance-based contracts helped the utility provide better 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) basis for 30 years, after which it is to be 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 numbers of household connections has increased by 8,000 and local industries have a reliable source of water.

In contrast to the Tirupur case, the Delhi Jal Board (DJB) has been 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 public money in the next couple of years to improve supplies and reduce non-revenue water (NRW), the privatisation move is being 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 by the Maharashtra and Gujarat Governments are noteworthy.

The Maharashtra government has become the first to set up a water regulator when it passed the Water Resources Regulatory Authority Act, 2005. The Gujarat Government is set to become the second State to have a water regulatory authority. The Gujarat Water Regulatory Commission Bill, 2006 aims to bring different departments under one roof for the purpose of water distribution, 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 capabilities of the private sector can improve operational efficiencies and the quality of services. However, the success of PPP projects would depend largely on the capability 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 enabling regulatory milieu, the private sector needs to demonstrate a willingness to accept business risks associated with such projects.

(The author is an Assistant Policy Analyst with CUTS Centre for Competition, Investment and Economic Regulation and can be reached at usm@cuts.org)