WATER AND SANITATION PROGRAM: TECHNICAL PAPER 64294 Cost Recovery in Urban Water Services: Select Experiences in Indian Cities March 2011 The Water and Sanitation Program (www.wsp.org) is a multi-donor partnership administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP MISSION: WSP’s mission is to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP FUNDING PARTNERS: The Water and Sanitation Program (WSP) is a multi-donor partnership created in 1978 and administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP provides technical assistance, facilitates knowledge exchange, and promotes evidence-based advancements in sector dialogue. WSP has of�ces in 25 countries across Africa, East Asia and the Paci�c, Latin America and the Caribbean, South Asia, and in Washington, DC. WSP’s donors include Australia, Austria, Canada, Denmark, Finland, France, the Bill and Melinda Gates Foundation, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. For more information, please visit www.wsp.org. AusAID provides WSP-SA programmatic support. ACKNOWLEDGMENTS: Peer reviewers: Lee Baker and Raghu Kesavan Task Managers: Vandana Bhatnagar and Nicholas Pilgrim Consultants: Ravi Kant Joshi and Chris Heymans Edited by: Anjali Sen Gupta Photo Credits: Sajid Darokhan Created by: Roots Advertising Services Pvt Ltd Printed by: Vashima Printers CONTACT US: Water and Sanitation Program, The World Bank, 55 Lodi Estate, New Delhi 110 003, India Phone: (91-11) 24690488, 24690489; Fax: (91-11) 24628250 E-mail: wspsa@worldbank.org; Web site: www.wsp.org The �ndings, interpretations, and conclusions expressed herein are entirely those of the author and should not be attributed to the World Bank or its af� liated organizations, or to members of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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For more information, please visit www.wsp.org. © 2011 Water and Sanitation Program Cost Recovery in Urban Water Services: Select Experiences in Indian Cities March 2011 Acronyms and Abbreviations ADB Asian Development Bank MCC Municipal Corporation of Chandigarh ARV Annual Rental Value MCH Municipal Corporation of Hyderabad ARWSP Accelerated Rural Water Supply Programme MoU Memorandum of Understanding ASCI Administrative Staff College of India MoUD Ministry of Urban Development AUWSP Accelerated Urban Water Supply Programme MSW Municipal solid waste BOT Build Operate Transfer NABARD National Bank for Agriculture and BPL Below the Poverty Line Rural Development CAA Constitutional Amendment Act NASSCOM National Association of Software and CAGR Compound Annual Growth Rate Services Companies CDP City Development Plan NRW Nonrevenue water GDP Gross domestic product O&M Operation and maintenance GIS Geographic information system OHT Overhead tank GoI Government of India PMC Pune Municipal Corporation HMA Hyderabad Metropolitan Area SCADA Supervisory Control and Data Acquisition HMWSSB Hyderabad Metropolitan Water Supply and SE Superintending Engineer Sewerage Board STP Sewage treatment plant HUDCO Housing and Urban Development SWM Solid waste management Corporation UJS Uttarakhand Jal Sansthan IMC Indore Municipal Corporation ULB Urban local body IT Information technology UPJN Uttar Pradesh Jal Nigam JNNURM Jawaharlal Nehru National Urban UWSEIP Urban Water Supply and Environment Renewal Mission Improvement Project KMC Kochi Municipal Corporation VAT Value added tax KSUDP Kerala Urban Sustainable Development WHO World Health Organization Project WTP Water treatment plant KWA Kerala Water Authority WSP Water and Sanitation Program LIC Life Insurance Corporation of India WSS Water supply and sanitation LMC Ludhiana Municipal Corporation ii Cost Recovery in Urban Water Services Units of Measure cm centimeter mgd million gallons per day kl kiloliter ml milliliter kld kiloliter per day mld million liters per day km kilometer mm millimeter km2 square kilometer ppm part per million lpcd liter per capita per day sq ft square foot m meter sq km square kilometer mg million gallons Currency Conversion US$1 = Rs. 42.8 (June 2008) Units of Land Measurement Conversion 1 acre = 4,840 square yards, 4067.23 m², 43,560 square feet 1 hectare = 2.5 acres 1 kanal = 605 square yards, 0.125 acres, 506 m² 1 square yard = 0.8361 m², 9 square feet www.wsp.org iii Contents Acronyms and Abbreviations ..................................................................................... ii Units of Measure ....................................................................................................... iii Currency Conversion................................................................................................. iii Units of Land Measurement Conversion .................................................................. iii 1. Introduction and Background............................................................................1 Cities Covered in the Study ............................................................................1 2. Operational Factors that Influence Cost Recovery ..........................................4 Service Coverage ...........................................................................................4 Water Losses and Nonrevenue Water .............................................................6 Metering, Billing, and Collection ......................................................................7 Staf�ng Levels ...............................................................................................8 3. Tariffs and Cost Recovery................................................................................10 Objectives of an Optimal Water Tariff.............................................................10 Tariff Levels and Some Impacts ....................................................................10 The Signi�cance of Tariff Structure ................................................................11 4. Affordability and Services to the Poor ............................................................13 Subsidies and Exemptions ...........................................................................13 The Costs of Connection ..............................................................................14 Standposts ...................................................................................................14 Coping Costs ...............................................................................................15 5. Implications ......................................................................................................17 A Strategic and Inclusive Process .................................................................17 Operational Improvements ............................................................................18 Reforming Tariffs through a Credible Process ................................................19 Build Supportive Institutions .........................................................................19 Summary ......................................................................................................19 References ................................................................................................................21 iv Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Contents Boxes 1: Key Concepts.................................................................................................2 2: Some Initiatives to Improve Billing and Collection ............................................8 Figures 1: Net Revenue Potential from NRW ...................................................................7 2: Net Revenue Potential from Improved Collection Ef�ciency .............................7 3: Synergies Between Access for the Poor and Cost Recovery ........................13 4: Improving Operating Practices ......................................................................17 5: The Main Message in a Nutshell ...................................................................20 Tables 1: Revenue Potential of Operational Improvements in Seven ULBs .....................4 2: Revenue Potential of Increasing the Consumer Base ......................................5 3: Revenue Potential of Reducing Nonrevenue Water .........................................6 4: Revenue Potential of Improving Collection Ef�ciency .......................................9 5: Objectives of an Optimal Water Tariff.............................................................10 6: Equivalence between Tariff Rates for Metered and Unmetered Connections .12 7: Charge for Subsistence Level Consumption Compared with Monthly Budget for People Living on the Poverty Line ..................................16 www.wsp.org v I. Setting adequate tariffs and improving tariff practice should be Introduction and part of urban service delivery reform. However, even while tariff Background reform is still in progress, service providers could improve cost recovery considerably by introducing more ef�cient operational practices. India’s Jawaharlal Nehru National Urban Renewal Mission understand the factors affecting cost recovery in India and (JNNURM) requires urban water service providers to provide an indication of current performance. It also draws recover the costs of their services through “reasonable user out examples and lessons to inform reform approaches and charges�. Internationally, the trend is for tariffs to cover the guidelines for reform. full costs of water supply and sanitation, including capital replacement and the remuneration of equity. In India, Cities Covered in the Study however, tariffs generally fall far short of recovering costs; The study provides only a ‘snapshot’ of the sector. Generally, even in as far as they attempt to do so, the common practice it was difficult to access reliable data from the seven cities, is one of operational cost recovery, and tariffs do not take particularly for sewerage costs and revenue. As a result, most into account capital costs. Box 1 elaborates on the difference of the discussion concerns water supply services, although between these approaches. it incorporated sewerage data where possible. The lack of reliable data highlights the need for improved information Setting adequate tariffs and improving tariff practice would management. For this reason, the Ministry of Urban therefore have to be part of urban service delivery reform. Development (MoUD) has placed considerable emphasis This field note argues, however, that even while tariff on data management in its Service Level Benchmarking reform is still in progress, service providers could improve initiative, which now covers 28 pilot cities in several states. cost recovery considerably by introducing more efficient operational practices. The evidence shows that—even at Based on these observations, the first part of the paper existing tariff levels—none of the cities included in the (sections on ‘Operational Factors that Influence Cost study achieves its revenue, and some are as much as 80 Recovery’ and ‘Tariffs and Cost Recovery’) discusses percent below their potential. Greater efficiency can go a operational and tariff-related factors that impede cost long way to redressing this problem, and improving service recovery by urban water service providers in India, especially delivery and cost recovery. low service coverage; high water losses and nonrevenue water; inefficient metering, billing and collection; and The report draws on a Water and Sanitation Program (WSP) high staffing levels. It also shows that distorted tariff study from 20081 which made a comparative analysis of structures and subsidies undermine cost recovery further, 23 urban local bodies (ULBs)—looking at seven cities and often benefit middle and upper income levels, rather in detail and another 16 based on secondary data2—to than the poor. Water and Sanitation Program (WSP) Study Cities ADB-MoUD-GoI Study Cities Dehradun, Ludhiana, Chandigarh, Indore, Pune, Ahmedabad, Amritsar, Bengaluru, Bhopal, Chennai, Hyderabad, and Kochi Coimbatore, Jamshedpur, Kolkata, Mathura, Mumbai, Nagpur, Nasik, Rajkot, Varanasi, Vijayawada and Vishakhapatnam 1 WSP. Cost Recovery and Tariff Practices for Urban Water Supply and Sanitation in India (unpublished). 2 The study looked at seven ULBs in detail, and used secondary data from 16 cities covered in a 2007 Asian Development Bank (ADB)/Ministry of Urban Development (MoUD) document, Benchmarking and Data Book of Water Utilities in India. www.wsp.org 1 Select Experiences in Indian Cities | Introduction and Background The second part of the note (sections on ‘Tariffs and Cost achieve improved cost recovery and, by implication, achieve Recovery’ and ‘Affordability and Services to the Poor’) service improvements, capital maintenance, and expansion discusses policy reform and practical initiatives and options to of coverage. Box 1 explains some of the key concepts. BOX 1: KEY CONCEPTS Cost Recovery a) Fixed charge. This means that the tariff level per Cost recovery in water supply and sanitation services unit remains the same whatever the volume of means that the total revenue to the service provider water consumed. It is commonly applied where equals (or exceeds) the cost of supply. A stable revenue consumption is not metered, or when the meters stream helps prevent cash flow or �nancing dif�culties are faulty or not read. for the utility. At least three types of cost recovery are b) Volumetric charge. Users are billed according relevant to this analysis: (a) operational cost recovery to the volume of water consumed; this requires means that the revenues are at least equal to the metering. Some service providers apply a flat operating expenses of providing a service; (b) full rate per cubic meter (m3) irrespective of total service cost recovery means that capital maintenance consumption. Others use a Block Tariff, whereby expenditure and costs of capital are also recovered: and one rate applies for consumption up to a certain (c) full environmental cost includes the external costs of level, while a different rate applies to consumption a service, including any environmental damage. beyond that level. Many utilities use an Increasing Block Tariff in which the �rst ‘lifeline’ block costs In India, the Government of India or state governments less and equates to typical household consumption have usually �nanced capital costs, so that the term per month for essential purposes (typically 6-10 cost recovery tends to refer to covering the operating m3).This means that all households can access a expenses. The extent to which cities actually cover basic level of service, while a higher tariff applies replacement, renewal, expansion, and other aspects of to consumption in the second block. routine maintenance varies from city to city, and often c) Two part charge. This comprises a �xed charge capital maintenance is not included. Internationally, plus a volumetric component. in many countries full service cost recovery is more common and, to enable this, service providers often Economic Ef�ciency are institutionally clearly separated from governments, User charges should be suf�cient to meet the marginal and given substantial autonomy for operations, and cost of supply. If the cost of supplying water from a proposing tariffs, within a clearly de�ned regulatory new source is higher than for the existing source, it framework which provides for third party review of may be necessary to adjust the tariff. Water supply tariffs. and sanitation improvement programs may result in changes in operating costs, which also need to Tariff be captured in revised tariffs. Elasticity of tariffs is A tariff is the set of prices, charges, and taxes used important: tariffs should be responsive to changes to generate revenue. A well-designed tariff enables in population, household income, and inflation, �nancially sustainable service delivery and encourages which affect demand and production costs. In the users to avoid wasteful consumption in one of the past, charges have remained �xed for long periods following ways: irrespective of these factors. 2 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Introduction and Background Equity and Affordability Operating Ratio Equity in water and sanitation services means that The operating ratio is a primary indicator of ef�ciency, user charges treat similar customers equally, and and expresses operating expenses divided by that customers in different situations are not treated revenue. An operating ratio less than 1 indicates a the same. Subsidies are often used to achieve surplus, while a ratio greater than 1 indicates a loss. equity, enable low-income households to gain house connections, or to make services affordable for the Nonrevenue Water poor. Commercially viable services and rational tariffs, This refers to water that is supplied free through however, often bring ef�ciency gains that may bene�t standposts or under an exemption policy; is consumed customers more than subsidies. When assessing without payment via theft or illegal connections; or is affordability, it is important to consider both the costs lost through leakage. The term ‘nonrevenue water’ of access (installation of facilities and connection to thus includes water lost or which has not yielded the city network) and consumption charges. Most revenue due to technical and nontechnical reasons. utilities can plan for phased increases in tariffs to be For better clarity of causes, this �eld note segregates compatible with users’ willingness and ability to pay. it under technical and nontechnical categories. www.wsp.org 3 II. Operational Factors More customers (higher service coverage) mean a larger revenue base for the service provider. There is a signi�cant potential that Influence Cost market for utilities since most poor households currently depend on limited standpost supplies or informal vendors. Recovery In this section, the report takes up the implication of the currently depend on limited standpost supplies or informal JNNURM approach that cost recovery through “levy of vendors. Where household connections do exist, low reasonable user charges� does not simply mean tariff increases, pressure and intermittent supply compromises the quality but requires that service providers also address issues of and measurability of services. operational efficiency. The key operating factors that affect cost recovery are discussed in more detail here, including Among the cities covered in the wider sample for this study, the study’s findings with respect to the 23 ULBs. Table 1 Mumbai and Rajkot had the highest coverage through provides an overview of the revenue potential of addressing household connections at approximately 98 percent, these operational issues for the seven cities studied in detail. followed by Kochi at 83 percent (Table 2). In most cities, however, coverage is much lower—in 15 of the cities Service Coverage studied, it was less than 50 percent, and in some cases even More customers (higher service coverage) mean a larger lower than 30 percent of estimated customers. Low service revenue base for the service provider.3 There is a significant coverage means less revenue, which in turn results in higher potential market for utilities since most poor households operating ratios/less efficiency. TABLE 1: REVENUE POTENTIAL OF OPERATIONAL IMPROVEMENTS IN SEVEN ULBS Rupees in Million Factors Dehradun Ludhiana Chandigarh Indore Pune Hyderabad Kochi Reducing total nonrevenue water 21 181 146 35 164 348 21 Improving collection ef�ciency 37 165 34 280 410 1650 357 Increasing consumer base 90 252 36 391 119 144 23 Total revenue improvement potential (A) 148 598 216 706 693 2143 401 2006-07 Total operative income (B) 130 225 492 159 1015 2572 193 Potential for increase in operative income A/B (%) 114% 226% 44% 444% 68% 83% 208% 3 The estimate for increasing consumer coverage was reached in four steps: (1) Establishing the total number of households by dividing the current population figures by average family size; (2) From this figure, deducting urban poor households and adding commercial and institutional establishments; (3) Deducting from the total consumer base the actual consumers; and (4) Multiplying the difference between total and actual by the minimum water charge. 4 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Operational Factors that Influence Cost Recovery TABLE 2: REVENUE POTENTIAL OF INCREASING THE CONSUMER BASE4 City Existing Status/Potential Working of Revenue Potential Increase Ludhiana 15% undeclared area of city not serviced, 62,000 kiloliter per day (kld) water Rs. 86 mn potential water demand 62,000 kl x Rs. 3.80 minimum rate x 365 Supplying water to industries, which 60,000 kld water x Rs. 7.60 Rs. 166 mn are currently not served. Potential water minimum rate x 365 demand 60,000 kl per day Pune Only 18,500 slum households paying 181,500 x Rs. 360 per year = Rs. 65 mn water charge while 181,500 slum Rs. 65 mn households do not pay any water charge Around 60,000 potential tax payers not in 60,000 x Rs. 900 per year Rs. 54 mn the water charge database minimum water charge Hyderabad Around 100,000 potential consumers 100,000 new consumers x 240 Rs. 144 mn can be added as per estimate of service kl water per year consumption x provider Rs. 6 per kl water Indore Of potential 342,000 consumers, only 181,000 potential consumers Rs. 391 mn 161,000 consumers are under water x Rs. 2160 per year minimum charges water charge Chandigarh Of potential 210,000 consumers, 80,000 potential consumers less Rs. 36 mn only 130,000 consumers are under 30,000 slum dweller = 50,000 water charges consumers x Rs. 720 per year minimum water charge Kochi Of potential 130,000 consumers, 22,000 potential consumers x Rs. 23 mn currently 108,000 consumers are under Rs. 1,080 per year minimum water coverage water charge (240 kl water per year consumption x Rs. 4.5 per kl water) Dehradun Of potential 135,000 consumers, 75,000 potential consumers less Rs. 90 mn only 60,000 consumers are under 25,000 slum dwellers x water charge Rs. 1,800 per year minimum water and sewerage charge In summary, most of the service providers in the 23 cities is, businesses and registered households) who are currently could expand their consumer base and improve their not part of the customer base. In cities such as Nagpur and revenue generation by extending the distribution network Nashik, the impact of extending coverage could be even and ensuring adequate bulk supply. For example, revenue greater, as less than 50 percent of their populations are in Ludhiana could (in theory) increase from Rs. 86 million currently connected. to Rs. 252 million if the potential water demand of 62,000 kiloliters per day in unconnected poorer areas and 60,000 The JNNURM scheme has assisted several cities to broaden kiloliters per day for industries was taken up. Pune could coverage of water supply, and has encouraged ULBs to achieve Rs. 120 million if it was able to bring some 181,500 deliver services to more people and to develop sustainable slum households into the system, who do not pay any systems for generating revenue by bringing more people water charge, and around 60,000 existing taxpayers (that into the formal networks. Often, even where network access 4 In the case of four cities—Pune, Hyderabad, Cochin, and Chandigarh—extension of network is not required as cities have claimed 100 percent area coverage by water supply network (see Table 4); while in the case of three cities—Dehradun, Ludhiana, and Indore—extension of water supply network will be required for increasing the consumer base. This will involve capital investment but figures were not available. www.wsp.org 5 Select Experiences in Indian Cities | Operational Factors that Influence Cost Recovery has been provided, service providers have to make sustained occurring during transmission and distribution, water efforts to encourage customers to obtain direct connections provided free through standposts or under exemptions and not depend on public standposts or self-provision. (often for the poor), and theft, including illegal connections. However, to derive the full benefit from more customers, it High levels of NRW are common throughout India. Delhi’s would be important to address the other operational factors NRW was estimated to be as high as 55 percent at the that currently impede cost recovery as described in the outset of the JNNURM in 2005/06; Ahmedabad and Goa following paragraphs. reported 36 percent and 47 percent respectively.5 Water Losses and Nonrevenue Water For the service providers assessed in this study, NRW was Nonrevenue water (NRW) refers to water that is produced estimated at 30–40 percent of production. This could not, but not sold to consumers. It arises from technical losses however, be measured accurately, either because production TABLE 3: REVENUE POTENTIAL OF REDUCING NONREVENUE WATER City Existing Status/ Working of Revenue Revenue Net Revenue Potential Action Potential Potential Potential for the (in Million City (in Million Rupees) Rupees) Ludhiana Reversing exemption Minimum annual water charge 181 181 of 72,000 households (Rs. 1,260) + sewerage charge and imposing water and (Rs. 1,260) = Rs. 2,520 x 72,000 sewerage charge households Pune Technical loss if reduced 150,000 kld water x 164 164 from 25% to 10% will save Rs. 3 per kl x 365 150,000 kld water Hyderabad Technical loss at 15% if 63,100 kl water savings 138 brought down to 10% will per day x 365 x Rs. 6 cost of save 63,100 kl water per day production per kl 348 As per water audit, illegal 96,320 kl water per day x 365 x 210 consumption of water is 7% Rs. 6 cost of production per kl of total water supply (96,320 kl water per day). Indore Technical loss at 14.4% if 8,000 kl water per day x 365 x 35 35 brought down to 10% will Rs. 12 cost of production per kl save 8,000 kl water per day Chandigarh Technical loss at 25% if 52,627 kl water per day x 365 x 77 brought down to 10% will Rs. 4 water charge per kl save 52,627 kl water per day 149 Unutilized installed capacity 49577 kl water per day x 365 x 72 is 8% (30,509 kl water per Rs. 4 water charge per kl day) + 5% water through standposts (19,068 kl water per day) Kochi Technical loss at 30% if 29,814 kl water per day x 365 x 22 22 brought down to 10% will Rs. 2 minimum tariff per kl save 29,814 kl water per day Dehradun Technical loss at 30% if 21,372 kl water per day x 365 x 21 21 brought down to 10% will Rs. 2.66 average revenue per kl save 21,372 kl water per day water 5 WSP Benchmarking Project, Phase I, 2005. 6 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Operational Factors that Influence Cost Recovery FIGURE 1: NET REVENUE POTENTIAL FROM NRW FIGURE 2: NET REVENUE POTENTIAL FROM NRW: Net Revenue Potential for the Cities IMPROVED COLLECTION EFFICIENCY Revenue Potential of Improved Collection Rs 350 – Ef�ciency (in Million Rupees) Rs 300 – Rs 1,800 – in Million Rupees Rs 250 – Rs 1,600 – in Million Rupees Rs 1,400 – Rs 200 – Rs 1,200 – Rs 150 – Rs 1,000 – Rs 100 – Rs 800 – Rs 50 – Rs 600 – Rs 400 – Rs 0 – Rs 200 – Ludhiana Pune Hyderabad Indore Chandigarh Kochi Dehradun Rs 0 – City Ludhiana Pune Hyderabad Indore Chandigarh Kochi Dehradun City and consumption of water are not metered at all, or In general, data on collection efficiency6 in the sample cities because meters are faulty. In the absence of hard data on proved hard to come by (due to lack of metering) and data NRW, it then becomes difficult to estimate the potential categories and definitions are not consistent. For example, for revenue improvements. With these limitations in mind, while Kolkata reports 100 percent cost recovery, the data Table 3 provides an estimate of the revenue potential of a on collection reflects only collections from industry and hypothetical reduction in NRW. The positive gains appear business clients, since there are no user charges for domestic to be substantial. While addressing some technical losses consumers. The cities with more reliable data typically are the may require capital investment, the results show that other ones that use volumetric metering on a larger scale, such as elements of NRW can be reduced significantly without Jamshedpur (100 percent), Kolkata (100 percent), and Nasik added investment, as they primarily require improved (92 percent). The next best performers were Coimbatore maintenance and efficiency. (75 percent), Nagpur (80 percent), and Vishakhapatnam (86 percent). Ludhiana (16 percent) and Kochi (13 percent) Metering, Billing, and Collection had the lowest reported levels of collection. As Box 2 shows, there have been some initiatives to improve billing and collection, but the impact is limited since More cities have been introducing meters, but the metering is rarely in place across whole cities, equipment is effectiveness varies. Inadequate maintenance is a common not functional, customers are not informed, and penalties problem, aggravated by the malfunctioning of the meters for nonpayment are still lenient. In some cities, billing and under conditions of intermittent supply, tampering with collection centers are only located at zonal level and therefore meters, and irregular meter readings. As a result, many not easily accessible for households. Many customers are households that have meters still receive bills on a fixed unaware of billing and payment procedures and often do charge basis, rather than tariffs reflecting incremental use not pay their bills on time. These are common problems in of water. Only seven of the 23 cities in the sample used many cities. metering on a large scale, while four cities (Indore, Bhopal, Mathura, and Varanasi) have no meters at all.7 6 It is assumed that a municipal body will improve its collection efficiency to 90 percent of current demand from its current level of collection efficiency. Past arrears or dues not included in this working; any improvement in that respect will be additional. 7 In the Indian context, as in most countries, the argument in favor of metering is that consumers are charged for what they use, and consumption is linked to actual costs of delivering the service. It should be noted that the question of metering and cost recovery as discussed here applies specifically to the drinking water service and not to broader water resources issues, and that other issues such as free standposts need to be managed and accounted for through systematic management of nonrevenue water. www.wsp.org 7 Select Experiences in Indian Cities | Operational Factors that Influence Cost Recovery BOX 2: SOME INITIATIVES TO IMPROVE BILLING AND COLLECTION A number of Indian water service providers (urban local for consumers to settle their debts quickly is not very bodies or utilities) have taken the initiative to address powerful. In 2006, the MCC introduced additional billing and collection. Most have not achieved full byelaws to assist revenue collection and since then cost recovery, in part because the service coverage has registered 4,012 cases of disconnection for is not wide enough and because tariffs remain very nonpayment of bills. low (in the expectation that �scal grants will continue to �nance services). However, these initiatives do In Hyderabad, bills are raised on a bi-monthly basis provide evidence of the kind of improvements that for domestic users, and on a monthly basis for others. can be made to widen the customer base and improve Payments are accepted at e-centers across the city, revenues. at designated cash collection counters of the utility (HMWSSB), and can be paid online. The Municipal Corporation of Chandigarh (MCC), for example, has a computerized bi-monthly billing system The Indore Municipal Corporation (IMC) introduced based on meter reading for the majority of customers, stringent penalties in 2007 to reduce the number of and a flat rate system for rehabilitation colonies, that illegal connections. If an illegal connection is tracked is, areas for rehabilitation and resettlement of people down, a charge of Rs. 2,500 is imposed for legalization, affected by the acquisition of land for public projects or involuntary displacement due to other reasons. in addition to payment of one year’s water tariff (Rs. Bills can be paid at the MCC of�ces, cash collection 1,920). The water tariff of Rs. 1,920 can be paid in centers, or e-centers. The MCC has also introduced a three monthly installments. Up to March 31, 2008, on penalty mechanism and a disconnection clause, based self-disclosure of an illegal connection, the Rs. 2,500 on a one-time surcharge of 10 percent on current had to be paid but the water charge was calculated demand though no surcharge is levied on arrears. at a lower rate, subject to a minimum charge of three Since the penalty does not accumulate, the incentive months’ tariff or Rs. 480. Staf�ng Levels maintenance through management contracts, and Nagpur Appropriate staffing levels and efficient task allocation has done so with billing and collection. The outsourced remain major challenges for most service providers. Of the positions do not appear in staff counts and payrolls, but are cities studied, Indore had the highest number of staff per included in various operating expenditure accounts. This 1,000 connections at 18.7, while Pune has the lowest at just makes it difficult to compare service providers, and the staff 1.94. The majority have a ratio of 5 or more. ratio may not fully reflect the number of people employed to deliver the service. Most ULBs that have outsourced say There is a growing trend of outsourcing operations and that it has brought efficiency gains. It continues mostly on a maintenance (O&M) functions. For example, Rajkot task-by-task basis and not as a ‘full service’ operator contract, has outsourced pumping operations, mains and lines in part because of public sector employment regulations, maintenance, sluice valve operations, and leak repairs. Nearby union resistance, and a lack of capacity among ULBs or Ahmedabad has outsourced production, operations and service providers to manage the contracting process. 8 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Operational Factors that Influence Cost Recovery TABLE 4: REVENUE POTENTIAL OF IMPROVING COLLECTION EFFICIENCY City Existing Status/Potential Action Working of Revenue Potential Revenue Potential (in Million Rupees) Ludhiana Total collection ef�ciency stands 90% of current demand of Rs. 169 million = 165 less than 20% Rs. 152 million + 20% of past arrears of Rs. 914 million = Rs. 183 million Making total potential recovery of Rs. 335 million less current recovery of Rs. 170 million. Pune Current collection ef�ciency 59%, 90% of current demand of Rs. 1,333 million = 410 current demand Rs. 1,333 million, Rs. 1,200 million less current collection of and current collection Rs. 790 Rs. 790 million Hyderabad Current collection ef�ciency 54% 90% of current demand of Rs. 4,536 million = 1,655 against annual billing/demand Rs. 4,088 million less current collection of of Rs. 4,536 million, and current Rs. 2,433 collection of Rs. 2,433 million Indore Total collection ef�ciency 22%, and 90% of current demand of Rs. 440 million = 280 current collection of Rs. 116 million Rs. 396 million less current collection of Rs. 116 Chandigarh Current collection ef�ciency 66%, 90% of current demand of Rs. 485 million 34 collection against past arrears 0%, = Rs. 436 million less current collection of and current demand Rs. 485.24 Rs. 402 million million Kochi Total collection ef�ciency 13%, 90% of current demand of Rs. 465 million 357 current collection is of Rs. 61 = Rs. 418 million less current collection of million, and current demand Rs. Rs. 61 million 465 million Dehradun Total collection ef�ciency 37%, and 90% of current demand of Rs. 130 million 37 current demand Rs. 130 million = Rs. 117 million and 20% of past arrears of Rs. 150 million = Rs. 30 million making total potential recovery of Rs. 147 million less current recovery of Rs. 110 million Outsourcing is not a panacea though. Some ULBs that remain a challenge even when services are outsourced; have outsourced operational tasks still have high staffing because the primary selection criteria is focused on technical ratios. Bengaluru, for example, still has 4.8 staff per 1,000 expertise, the managerial capacities of potential contractors connections, and Chennai has 13.3 despite outsourcing does not always receive adequate attention. production and distribution. Workforce management can www.wsp.org 9 III. Generally, households with metered connections pay less, but Tariffs and they pay for what they use, whereas �xed charges result in Cost Recovery huge wastage because people lack the incentive to contain their consumption. Objectives of an Optimal Water Tariff the incremental cost of source augmentation and new water Cost recovery is not possible unless water is priced correctly. supply infrastructure Table 5 summarizes the objectives of an optimal water tariff and their implications, and the key issues identified here are Tariffs that are either fixed or set too low reduce the ability discussed in more detail in the sections that follow. of service providers to recover costs, and to promote water conservation and the economic use of water. In the absence of effective metering, volumetric charges, even where Tariff Levels and Some Impacts these exist, are not implemented. Only a few cities like The analysis in the 23 cities shows that low tariff levels Bengaluru, Chandigarh, Pune, Kochi, and Mumbai have remain a major impediment to the financial sustainability of metered connections, but meters are often of low quality, services and of service improvements. In Chandigarh, tariffs inadequately maintained, and there is a lack of sanctions are so low that even poor households have no incentive to against tampering with meters. Intermittent water supply limit their consumption. In Hyderabad, the tariff structure leads to meters running on air, which shortens their lifespan reflects costs more realistically, but there are high technical and causes metering errors. Continuous (24x7) supply and losses and the meter default rate is 25 percent. In none of a clear standard for the quality of meters are among the the cities did tariffs reflect the average cost of production or possible solutions to these problems. TABLE 5: OBJECTIVES OF AN OPTIMAL WATER TARIFF Objective Implication Cost recovery Operation and maintenance costs of supply should be recovered in full. There can be a gradual increase in recovery of capital maintenance costs and cost of capital. In addition, the revenue stream should be relatively stable and not cause cash flow or �nancing dif�culties for the utility. Economic ef�ciency Prices should signal to consumers the costs that their decision to use water imposes on the rest of the system. Equity and fairness Prices should treat similar customers equally, and ensure that customers in different situations are not treated the same. Resource Prices should discourage excessive or wasteful use of water, thus conservation promoting conservation. Acceptability To mitigate political controversy, customers and interest groups should be given due opportunity to provide inputs and raise concerns in the process of price determination. Simplicity and A tariff design should be easy to understand as far as payers are transparency concerned. Prices must also be determined in a transparent manner. Source: WSP, 2006 research. 10 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Tariffs and Cost Recovery Transparency of tariffs lends credibility and helps ensure broad acceptance because it helps customers understand how tariffs are calculated, and it enhances the public and political leadership’s trust in the process. There have been some initiatives to achieve some of these attributes. For example, Hyderabad and Chandigarh adopted Citizen’s Charters to enable clear communication between the service provider and users, and both have complaints redressal systems. Pune’s tariff structure is user-friendly, with online self-calculation for property-based charges and bill payment possible through banks and kiosks in accessible locations. Indore set a tariff structure valid until 2010 that will enable the municipality to make long-term plans for revenue improvement, and that is open to public scrutiny. While the absence of data makes it difficult to track whether intentions have been met, and whether local conditions have been taken into account adequately, overall the subsidies for water and sanitation are complex and do not meet their equity objectives. The Signi�cance of Tariff Structure and Dehradun use fixed charges based on the annual rental In the absence of effective metering, the quality of data is value (ARV) of properties. Registered properties in Pune weak, so that virtually all Indian cities apply fixed charges, are charged between Rs. 75 to Rs. 208 per month and in based either on the diameter of the connection, or the assessed Dehradun bills range from Rs. 80.50 to Rs. 172.50. Where value or size of the dwelling. However, increasingly there is a large numbers of customers (like 40 percent of households mix of fixed and volumetric tariffs for water supply, and this in Dehradun) are not registered for property tax, substantial is the case in 19 of the 23 cities included in the sample for this revenue losses occur. On the other hand, Pune Municipal study. In some of the metropolitan cities, such as Bengaluru, Corporation has an updated property tax register, which Chennai, and Delhi, increasing block tariffs are common. has generated enough revenue to create an operating surplus despite a high level of NRW and low collection efficiency. Fixed charges remain common practice, on the assumption that they generate revenue roughly equal to what volumetric Industrial tariffs are generally higher than domestic ones, tariffs would have done. However, this is rarely the case sometimes six or seven times higher. In Pune, for example, since fixed tariffs are mostly based on plot size or property the domestic metered rate is Rs. 3 per kl against Rs. 21 per tax rates, rather than household consumption or ability to kl for nondomestic metered consumption. In Hyderabad, pay. This places further constraints on revenue, as property consumption up to 15 kl is available at Rs. 6 per kl, while tax assessments have not been updated in many Indian general industries pay Rs. 35 per kl and water-intensive cities, and fixed charges rarely reflect inflation in the costs of industries Rs. 60 per kl. In the light of these charges, bulk delivering the service. consumers often switch to alternative water sources if they become available. When this happens, public service The numbers tell a powerful story on the implications providers lose substantial revenue and this can affect the of fixed charges. In Ludhiana, households with plot sizes recovery of O&M costs for the service as a whole. of 50 to 125 square yards consume 30 kl per month on average, yet they are exempted from water charges. If these Insights into the fixed charge tariff structures can be obtained consumers had meters and were paying the volumetric tariff by comparing what customers with unmetered and metered of Rs. 3.50 per kl, they would pay Rs. 105 per month. Pune connections pay for the same monthly consumption, in the www.wsp.org 11 Select Experiences in Indian Cities | Tariffs and Cost Recovery same city—assuming both systems are in operation (see Table in the flat rate. Obviously then, having fixed charges is not 6). Assuming that a typical household consumes 20 kl per good for conservation, but less obviously, yet significantly, month (130 lpcd), the analysis shows that Ludhiana charges having meters reduces monthly bills. If these good practices more for unmetered connections (Rs. 105–140 per month form part of a systematic program of metering, they can per connection) than for metered ones (Rs. 76 per month also help to increase the utilities’ revenues by increasing per connection). The same is true in Pune, which charges the number of households with a legal and registered Rs. 75–Rs. 208 per month per connection for unmetered connection, which is metered and therefore takes full connections, and Rs. 60 per month for metered ones. account of the actual volumes of water consumed. Generally, households with metered connections pay less, Table 6 shows that only in a few cities are charges for metered but they pay for what they use, whereas fixed charges result and unmetered connections broadly similar. The widespread in huge wastage because people lack the incentive to contain use of unmetered connections is a significant barrier both to their consumption. This wastage is not captured accurately resource conservation and the recovery of O&M costs. TABLE 6: EQUIVALENCE BETWEEN TARIFF RATES FOR METERED AND UNMETERED CONNECTIONS Particulars City Minimum Fixed Charge Volumetric charge for 20 kl per Month (in Rupees) Consumption per Month (in Rupees) Ahmedabad 73.258 60 Amritsar 60–120 64 Bengaluru No �xed charge connections 156 Bhopal 60 70 Chandigarh 100 26.25 Chennai 50 150 Coimbatore 50/tap/month 3 kl free +59.5 Dehradun 80.50–172.5 No volumetric charge for domestic consumers Hyderabad No �xed charge connections 130 + 190 minimum monthly charge Indore 160 240 Jamshedpur 120–360 158 Kochi Water supplied through 50 + 2 minimum monthly charge standposts paid by KMC9 Kolkata Free for domestic consumers Free for domestic consumers Ludhiana 105–140 76 Mathura 12.5% of ARV No metered connections Mumbai 12.5% of ARV 45 Nagpur 75–350 115 Nasik 67.5–9010 70 Pune 75–208 60 Rajkot 40–120 240 Varanasi 30 40 Vijaywada 80 240.25 11 Vishakhapatnam 80 80 8 For ½� connection on pro-rata basis. 9 Kochi Municipal Corporation. 10 Range based on frequency of water supply (once/twice a day). 11 For regular domestic connection, while rates for below the poverty line (BPL) households are Rs. 50/month. 12 Cost Recovery in Urban Water Services IV. A critical issue is that in many cases poor households cannot Affordability and even access the public supply, or have only limited access, and Services to the Poor they have to purchase water at high rates from private vendors. The JNNURM and the 11th Plan both recognize the need and Rajkot). Current charges in Indore, Hyderabad, for pro-poor strategies to service delivery, and the need Bengaluru, and Vijayawada are higher than the World for reform to make the implementation of such strategies Health Organization (WHO) benchmark of expenditure at more efficient and effective. Figure 3 demonstrates that 5 percent of monthly household income for 20 kl/capita achieving services that are inclusive of the poor is a logical consumption. In the other cities, the burden of water charges part and parcel of a sensible cost recovery and performance is within the notional 5 percent monthly limit. However, a improvement strategy. It is not an add-on. critical issue is that in many cases poor households cannot even access the public supply, or have only limited access, and they have to purchase water at high rates from private FIGURE 3: SYNERGIES BETWEEN ACCESS FOR THE POOR AND COST RECOVERY vendors. This can raise monthly water bills considerably. Subsidies and Exemptions Reduction in Subsidized tariffs are common practice. While subsidies Connected costs are justified on the grounds that the poor cannot afford higher tariffs, in practice because many of the poor are not Increased direct connected it is the better-off connected households that connections Cost recovery benefit. In India, about 70 percent of those benefiting from for the poor - NRW reduction - Increased subsidies channeled to private connections are not poor, coverage while 40 percent of poor people do not receive subsidies Assuming: - Rationalized subsidies because they do not use any public water services.12 A - Efficient billing and collection study on individual household subsidies in Bengaluru in 2001 suggests that about three-quarters of the available subsidies do not benefit the poor.13 Bengaluru, Chennai, GoI currently defines the poverty line as a monthly income and Hyderabad have been using increasing block tariffs of Rs. 2,795 in urban areas. To assess the affordability of with heavily subsidized first blocks and highly subsidized current water charges, the cost of subsistence consumption tariffs that are much lower than the unit production cost in the range 5 to 20 kl per month can be expressed as a of water.14 However, since the “lifeline� block is typically percentage of the monthly budget of a family of five living too high,15 many better-off households also end up falling on the poverty line (Table 7). within this block. These tariffs may also not work favorably for the poor because poor people often share connections Of the 23 cities studied, five provide free water to the and the combined demand from several households pushes urban poor (Ludhiana, Ahmedabad, Amritsar, Kolkata, them above the “lifeline� block level. 12 Source: Water Tariffs & Subsidies in South Asia Series Papers, Paper 4: ‘Do current subsidies reach the poor?’ April 2003. 13 Source: Water Tariffs & Subsidies in South Asia Series Papers, Paper 5: ‘Can subsidies be better targeted?’ April 2003. 14 These cities include Bengaluru, Chennai, and Hyderabad. 15 Lifeline block is set such that it ensures that the poor are provided with affordable access to a subsistence level of water. www.wsp.org 13 Select Experiences in Indian Cities | Affordability and Services to the Poor A number of cities offer full exemptions from user charges to help them meet connection costs and some portion of their poor customers. Dehradun, for example, has a fixed charge water bill. In this way, the utility can charge commercially water tax with an exemption for people whose property tax appropriate rates for connections and water services rate is assessed at less than Rs. 360. However, anyone (rich without excluding the poor. The data suggests that there or poor) who buys a house connection becomes subject is substantial unexploited cost recovery. The fee charged to a basic monthly charge of Rs. 75. There is, therefore, by the 23 service providers for a new house connection is a disincentive to taking a house connection, especially Rs. 2,594 on average while associated network expansion for those on low incomes. Chandigarh charges a fixed costs are three or four times higher, typically Rs. 7,500 to charge of Rs. 100 per month per dwelling unit for poor Rs. 10,000. Only Pune has a comparable connection fee, households with a house connection, but average monthly at Rs. 8,541, followed by Vijayawada at Rs. 5,500 and bills for nonpoor households with meters are only Rs. 79 Dehradun at Rs. 4,090. Twelve cities have a connection for consumption of 30 KL water. In Pune, the tariff for charge between Rs. 1,000 and 3,000 while the remaining poor households is Rs. 30 per month while other domestic eight charge less than Rs. 1,000. The subsidies on connection consumers typically pay Rs. 75–Rs. 208. Interestingly, the charges (where provided) usually do not reach the poor, poor households in Pune enjoy not only a lower tariff but a due to various other entry barriers including procedural better level of service than others since poor settlements are complexities and documentation requirements. Only a few mostly in low-lying areas were water pressure is higher and of the 23 cities currently offer assistance with connection the supply operates for more hours per day. charges. For instance, Vijayawada and Hyderabad have simplified procedures and allow payment in installments, Ludhiana is an unusual case. Here, the Government of which seems to have offered a pragmatic option that Punjab grants complete exemption from water and sewerage benefited poor customers. charges for plots of 125 square yards (sq yd) or less. Since most poor households typically occupy plots no more than Standposts 40 sq yd in area,16 this exemption benefits not merely the Nearly all the 23 cities provide free water through standposts poor but also a wide range of better-off consumers. Most for the benefit of poor residents, but find it difficult to poor families do not have house connections and were ensure that only the poor use them. For example, in Kochi, already using free standpost and tanker supplies before the the Kerala Water Authority (KWA) acknowledges that there exemption came into effect. Following the exemption, the is widespread exploitation of standposts by commercial poor continue to receive an inadequate service, without users. In Hyderabad, free water is supplied via standposts access to house connections. and handpumps but there is no subsidized rate for the poor within the regular tariff. This discourages poor families The Costs of Connection from taking house connections, and partly explains the high Connection charges show significant variation across the number of illegal connections in poor areas. In Pune, more cities. High costs can inhibit access to the poor. A snapshot than 80 percent of slum households receive free standpost study for WSP by the Administrative Staff College of India supplies, but another 12 percent formally registered as (ASCI) in 2008 showed that on average Indian cities charge standpost users pay a fixed charge of Rs. 30 per month. Rs. 1,000–Rs. 1,200 for a new connection, and that this mostly makes it difficult for poor people to access the These examples highlight a lack of effectively targeted service.17 Internationally, governments have also faced this measures to help poor consumers. Either subsidies benefit problem, and there is now consensus that good practice is to too many nonpoor users, or there is free provision for the have transparent and direct subsidies to poor households to poor but with a very low level of service and few incentives 16 Average holding of poor people/slum dwellers is considered between 25 to 40 sq m. 17 Unpublished ASCI note, 2008. 14 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Affordability and Services to the Poor to take a higher level of service. The experience in countries means installing ground or overhead storage tanks with like Chile and South Africa may be instructive here. In pumps to cope with intermittent and low-pressure supplies, both countries, services are fully costed, but fiscal transfers or developing alternative supplies such as tubewells. Poor are used to reimburse either the service provider or poor consumers who have no taps and cannot afford tanks or households and thereby make the services affordable to the their own private supply incur other costs by buying water poor. Currently none of the 23 Indian cities in our study and from private vendors (usually at very high rates compared their state governments operate such a system. As a result, to municipal water) and spending long periods queuing at public taps. It was not possible to work out coping costs poor people do not receive adequate services, while service under this study and there are not many studies on this providers are missing an opportunity to increase revenue aspect. It was earlier estimated that households with private though expanding the number of house connections. connections in Dehradun and Delhi bore a coping cost of Rs. 3.5 per kl against consumption charges of Rs. 1 per kl Coping Costs in Delhi and Rs. 3 per kl in Dehradun. During this study, An additional burden for all service users is the coping costs discussions with users in Dehradun indicated that current arising from inadequate public supplies. For those with coping costs are in the order of Rs. 200 to Rs. 250 per house connections, and who have the resources, this usually month compared to water charges of Rs. 85. www.wsp.org 15 TABLE 7: CHARGE FOR SUBSISTENCE LEVEL CONSUMPTION COMPARED WITH MONTHLY BUDGET FOR PEOPLE LIVING ON THE POVERTY LINE 16 Particulars Metered Water Tariffs Unmetered Water Tariffs Sewerage Tariffs City Water tariff Water tariff Water charge Water charge Fixed charge/ Water charge Sewerage Sewerage for 5 kl for 20 kl for 5 kl as a for 20 kl as a month for unmetered charge/cess charge as % consumption consumption % of monthly % of monthly connection as of monthly budget budget % of monthly budget budget Ahmedabad Free water for the poor Amritsar Free water for the poor through public taps Bengaluru 30 156 1% 19% Bhopal 17.5 70 1% 3% 60 2% Chandigarh MCC is now converting �xed charge connections to the poor into metered connections 100 4% 5/WC/month 0% 8.75 26.25 0% 1% Select Experiences in Indian Cities | Affordability and Services to the Poor Chennai 12.5 150 0% 5% 50 2% Coimbatore 3 kl free + 7 3 kl free + 59.5 0% 2% Dehradun No metering in domestic sector 116.9118 3% 1519 1% Hyderabad 120 220 4% 8% No unmetered connections 35% of water supply charges Indore No metered connections in slums 170 6% No charge Jamshedpur No metered connections in poor households 120 4% Kochi 12 52 0% 2% Through standposts paid by municipality No charge Kolkata No water charge for domestic users Ludhiana No metered connections in slums Exempt up to 125 sq yards Exempt up to 125 sq. yards 18 Based on average of ARV-based slab rates for water charges for registered domestic users. 19 Based on average of ARV-based slab rates for sewerage charges for registered domestic users. Cost Recovery in Urban Water Services V. Signi�cant revenue potential exists for service providers by Implications just bringing about improvements in operational ef�ciency and without necessarily increasing the levels of tariffs. The previous sections discussed various dimensions of for Information System Improvement Plans. It also provides cost recovery, both through efficiency improvements and an opportunity to begin estimating the actual costs of through restructuring tariffs. The analysis in 23 cities services, from production or sourcing of water, transmission showed that some service providers (ULBs or utilities) have through to distribution, and understand variations between been introducing initiatives to get closer to some of these zones or regions and user groups. Figure 4 summarizes the objectives. However, overall water and sanitation remains links between such an assessment phase and the subsequent one of the weakest public service sectors in urban India, and steps to introduce operational efficiency and performance its prospects for sustainable improvements are curbed by a improvements. lack of sustainable finance including cost recovery. To ensure sustained cost recovery and efficient service It is for this reason that the JNNURM guidelines require delivery, decision makers need to make investment choices municipal service providers to reform the framework of that are financially and operationally sustainable. A financial user charges for water and sanitation services. This report is model provides the basis for longer term strategic planning in concerned with key elements of the strategy required to put order to match engineering designs and costs with financing services on a financially sustainable footing. and customers’ willingness to pay. This brings transparency to the choices made with respect to improvement programs, A Strategic and Inclusive Process available financing (including subsidies), and cost recovery Perhaps no point is more vital than the need for a systemic from tariffs. Such financial models (business plans) can be set of reforms to change the rules of sector governance. This used as the basis for applications for financing or as part of includes increasing tariffs to ensure that pricing reflects the the regulatory process to set service standards and tariffs. cost of water, and being inclusive, that is, putting in place social policy measures to address the specific issues of access FIGURE 4: IMPROVING OPERATING PRACTICES for the poor. Within such a framework, a multi-staged process of financial performance improvement and revenue- 1 2 3 Measure generation is needed to take reforms forward. This requires Understand Estimate revenue the present cost of service improvement a combination of ‘quick win’ interventions, along with long- situation provision potential from operational factors term shifts in management and planning systems. Key parameters to Estimate marginal Prepare a revenue No systematic change can be sufficiently coherent unless analyze, include: cost of each performance dimension of service improvement plan. it starts with a detailed assessment of the current status of - Coverage Areas to focus on are: - Production/consumption services, both operationally and financially. In this respect, - Improving billing - Nonrevenue water and collection the analysis shows the absence of data as a fundamental - Metering - Increasing weakness in the water and sanitation sector in India. A - Costs and staffing customer base review could highlight the scale of this problem, and the - Billing and collection - Reducing nonrevenue water - Financial health key steps required to change it in line with the MoUD - Equity initiative on Service Level Benchmarking and, in particular, www.wsp.org 17 Select Experiences in Indian Cities | Implications Operational Improvements Significant revenue potential exists for service providers by just bringing about improvements in operational efficiency and without necessarily increasing the levels of tariffs. This could provide smaller ‘quick wins’, such as increased coverage, improving billing, meter reading, and collection. To the extent these translate into perceived improvements in services, it creates a more conducive environment for initiating tariff revisions. Increasing service coverage. In many Indian cities, up to 50 percent of potential customers do not appear on the service provider’s database. Reasons include administrative inefficiency in tracing and registering all service users and operational policy that does not charge different users separately within buildings under multiple occupancy. Providers may also be unable to serve some households due to network limitations, and some households may be reluctant to apply for connections, or opt for illegal connections. The consumer base could be expanded through a mix of lack of willingness of consumers to pay because the service improved administration, service delivery improvements, is so bad. Reduction in NRW not only leads to revenue and the use of incentives. Clearly, surveys are required to enhancement as free water starts getting sold at price but also identify existing service users, while regularization of illegal to saving of water which translates into less need for water connections opens the way for increasing the number of source augmentation and new water supply infrastructure. paying customers. Separate metered connections to each user within buildings having multiple occupancy would make Improving metering, billing, and collection. In the estimates more accurate and provide stronger incentives for case studies, failure to collect the amount billed against them to pay. services has resulted in revenue losses of up to 50 percent. Inefficiencies in billing and collection also carry opportunity Reducing water losses and NRW. In spite of its potential cost, such as increased interest costs on overdrafts. benefits, NRW reduction is not easy to implement since it requires a far greater attention to technical issues such as pipe A starting point for improving billing and collection is to laying, pipe joints, pressure testing, quality of meters, and review the consumer database and current billing processes. improved management practices. For instance, to eliminate This may reveal a variety of options, such as the need illegal connections that contribute to NRW requires that for a comprehensive survey of household connections, service providers have autonomy and discipline, and are made outsourcing the service through incentive-based contracts, accountable to keep illegal connections under control. consumer-friendly billing and payment options, and applying penalties for nonpayment. NRW is a result of technical and operational inefficiency. Technical losses are a result of poor capital maintenance and Working meters are important for the effective weak incentives for water conservation. Commercial losses implementation of volumetric tariffs as also for sustainable include less than 100 percent billing, distribution of free NRW management. Measuring the exact volume of NRW water (public standposts as well as illegal connections), and requires that both flow meters at production points and 18 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | Implications consumer meters are in place, and are running. The study and responsibilities, a lack of clarity, lack of autonomy, found that progress is occurring on this front: Bengaluru, lack of accountability, and multiple/conflicting objectives. Chandigarh, Chennai, Dehradun, Hyderabad, Jamshedpur, In such an environment, it becomes impossible to hold and Pune are among the few cities where the volume of underperformers to account. water produced is now being measured with the help of flow meters. The 74th Amendment provides the ULB with the responsibility to organize the delivery of water services Reforming Tariffs through a Credible Process and to set tariffs. There can be no financial empowerment, Increasing tariffs is politically difficult, with risks of consumer however, without clear assignments of both expenditure backlash. The message from the analysis is that part of this authority (for example, services such as water and sanitation risk can be mitigated by becoming more efficient in other and land management) and revenue-raising capacity, while aspects of revenue management. setting clear expectations for improving ULB and service providers’ own revenue. In fact, the findings of willingness to pay surveys show that households and businesses are willing to pay much This will also require regulatory reform, to ensure more for a better service. Many are actually spending independent setting, or reviews of requests for adjustment large amounts to develop and operate substitutes to cope of water supply and sanitation (WSS) tariff to meet policy with the substandard service provided by public utilities.20 objectives in terms of service deliverables such as financial, Having a good communications strategy is key, since the economic, equity and simplicity objectives, and independent rationale for tariff reforms needs to be set out clearly and monitoring of service provider performance. Once again, agreement reached between the main stakeholders. Second, the need for credible baseline data becomes important, to a concerted focus on viable service improvements by enable regulatory structures to monitor the performance investing in improved efficiency makes it more legitimate of WSS service. It is unlikely though that a uniform to raise the prospect of tariff increases. In the latter case, the approach would be feasible in India, and considerable state biggest opportunity open to the sector today is the move engagement would be needed to ensure that regulatory to 24x7, where experience shows that moving to 24x7 not arrangements are suitable to their contexts. only improves the quality of service but also leads to lower household bills and reduced water demand.21 Summary Water services in more than half of the 23 cities analyzed The study showed that tariff structures are overly complex. here are suffering substantial operational losses. None of A key challenge would therefore be to make tariffs these ULBS met their revenue potential, and most of them understandable for customers, and to avoid complex fail to cover their operational costs by up to 80 percent. subsidization rules and processes. Instead, subsidies need to be well targeted and transparent. It is true that low tariffs are a reason for this: tariffs are mostly based on estimates rather than quantified costs Build Supportive Institutions and margins. However, the study draws attention to the In a typical urban water department in India, the roles of fact that a large part of cost recovery concerns operational policy making, regulation, and service delivery are vested in factors such as low coverage of registered connections, high a single entity—the ULB or the state-level Public Health levels of leakage and NRW, poor metering practices, and Engineering Department. There are many overlapping roles inefficient billing and collection. 20 Word Bank. 2006. Bridging the Gap between Water Supply and Infrastructure Services. Delhi. 21 WSP. 2010. 24x7 Water Supply is Achievable! The Karnataka Urban Water Sector Improvement Project. www.wsp.org 19 Select Experiences in Indian Cities | Implications What the study shows clearly is that (a) many of the Plans. It is clear from the analysis that cost recovery is solutions require improved management and operations; unlikely if it is approached in isolation from broader and (b) there is a need for improved fiscal and tariff reforms to improve governance, management, service discipline. Figure 5 captures this main message. The report delivery, and fiscal/tariff discipline. It is not merely about has alluded to a number of MoUD initiatives that are tariff increases; in fact, a focus on operational efficiency moving the sector in the right direction, such as the Service reduces upfront political resistance to cost recovery, Level Benchmarking initiative and associated Information and shifts the emphasis to improved services, inclusive of System Improvement Plans and Service Improvement poor people. FIGURE 5. THE MAIN MESSAGE IN A NUTSHELL Address operational inef�ciencies Address cost recovery reforms in context of - Develop rational basis for tariff calculations other reform options - Demonstrated ef�ciency gains create conducive environment and performance for tariff reforms improvement Undertake tariff reform 20 Cost Recovery in Urban Water Services Select Experiences in Indian Cities | References References ADB (Asian Development Bank). 2007. Benchmarking Subsidies in South Asia, World Bank-Water and Sanitation and Data Book of Water Utilities in India. Manila. Program and Public-Private Infrastructure Advisory Facility. Washington (www.wsp.org, www.ppiaf.org). Boland, J. 1993. Pricing Urban Water: Principles and Compromises. Water Resource Update. Universities World Bank. 2006. Bridging the Gap between Water Supply Council on Water Resource, Issue No. 92 (Summer and Infrastructure Services. Delhi. 1993), pp. 7–10. WSP. 2010. 24x7 Water Supply is Achievable! The Whittington, D., J. Boland, and V. Foster. 2002. Karnataka Urban Water Sector Improvement Project Understanding the Basics. Paper 1: Water Tariffs and (unpublished). www.wsp.org 21