Breaking the vicious (water) cycle

An efficient water utility is at the core of the reform process. The roadmap for utility reform has to overcome the triple problems of low investments, low recovery, and poor levels of service, writes Abhay Kantak
 
The urban water supply and sewerage (WSS) utilities in India suffer from poor quality infrastructure and service delivery. Barring a few exceptions, no city is found to be performing well when measured against the standard performance indicators. The cities are in general poorly managed and operate with tariffs well below the cost recovery levels. They are struggling financially and lack the governance structure and resources to improve performance. 

The water sector has considerable emotive appeal. Because water is so important in people's lives, it is often exploited for political reasons. Not all non-performance issues can be explained by these factors. The lack of service orientation and poor accounting or asset management practices are some such issues. The grant or donor-based funding approach to capital investments with built-in presumption on non-recovery of user charges has not subjected the utility managers to the commercial discipline which their counterparts in other infrastructure sectors are constantly been evaluated. 

The sector goes through several investment cycles but seldom have the utility managers been made accountable for past investments and the service levels delivered. The absence of pressure to perform has over the period of time blunted the ability of the utility managers to manage water supply operations effectively and efficiently. The gradual decay in managerial capacity and inadequate accountability make a potent comb­ination for non-performance.
 
Sector reforms in the past
The response to sector performance improvement is often seen as an external intervention required. Solutions such as developing Public-Private Partnership (PPP) models or more providing grant funding are often explored to address the problem of performance improvement. In the absence of internal drive for performance improvement, the external interventions planned would not be effective. 

The first step for any performance improvement planning exercise is knowing the current performance metrics in a reliable manner. But performance of a water utility is seldom reliably known. The projects are often designed to create assets rather than improving service delivery. Today, several PPP projects are encountering problems in implementation on account of the unreliable baseline performance data provided to the private operators.
 
Internalising the utility reform agenda
Quality and reliability of service is a serious issue for the consumers. The soft financing approach is not serving the existing consumers well and jeopardising the ability of the system to generate resources to meet the demands of the unserved consumers. Nor is this approach allowing the scarce public funding available to be supplemented by funding from commercial sources. 

Often in the past, government grants or PPP interventions have been the starting point or prime drivers of utility reform. These interventions, though needed, should supplement the utility efforts. Utilities today have poor operating performance, high inefficiencies, and weak managerial capacities. The focus of the utility at this stage should be on improving internal efficiencies. They should target improvement in collection efficiencies, reduction in apparent water losses, quick reduction in technical losses, and visible improvements in customer service. These efficiency improvements are the core of utility operations. The momentum generated by the internal reform process for performance improvement when supplemented by large-scale external public or non-public funding, will improve sector performance.
 
Designing institutional structure  
The objective of the reform process is to make utilities more accountable for service delivery. The institutional reform design should serve to achieve this objective. Water being a state subject, different states have different institutional structures for service delivery. Three institutional service delivery models are prevalent in the country. The learnings from studying the different prevailing institutional models are pre­sented below.
 
Government support to utilities during transition phase
Today, government support is provided to utilities without an internal reform momentum to improve performance. Ring-fencing is expected to put pressure on the utilities to develop performance-oriented culture. At this stage, the utilities may continue to require budgetary support. By providing performance-linked budgetary support, the governments will introduce the next critical structural change. In the medium term, utilities will continue to depend on the public budgetary support for meeting the capital requirements. 

The extent of support to be made available and timing of such payments needs to be communicated to the utilities. The utilities should build sound databases and systems including baseline system maps, costing systems, and financial management systems. The utilities should also benchmark themselves with their peers to identify areas of improvements and implement best practices. 

Moral hazard can result in utilities turning to their old ways given the government's willingness to periodically write off utility debts. As a part of the reform process, the extent of write off can be linked to the pre-determined performance milestones that the utilities would need to achieve as per the agreed timelines. A moratorium of the unpaid liabilities in the intervening period can be put in place.  

The utilities need to prepare a credible performance improvement plan for achieving the milestones identified in the performance contract signed with the government. The performance improvement plan will be an aggregation of minor and major projects leading to the achievement of the performance targets. A critical component of the improvement plan will need to be process improvement, which can result in additional revenues or cost reductions without any significant capital expenditure. Increasing the consumer base through simplification of the new connection application process or identifying unauthorised connections and legalising them by imposing a one-time penalty are some measures that the utilities can take up immediately.  

The performance improvement areas for the utilities are many. Reduction in non-revenue water, increase in the consumer base, and reduction in operational costs can be some of the identified areas of intervention. Availability of skills or capacity can be a constraint for the utilities for performance improvement through such interventions. The utilities can engage the private sector through service or performance contracts for making such interventions possible.   
 
In summary
An efficient water utility is at the core of the reform process. The roadmap for utility reform has to break the vicious circle of low investments, low recovery, and poor levels of service. The need for financial viability has been under-emphasised and neglected in the past, compared to other sectors. The costs of neglect, which are cumulative, will take a longer time to be paid.  
 
The author is Head-Urban Practice, CRISIL Infrastructure Advisory.