Fixing urban water pricing

Water pricing needs to be tackled concurrent with improvement in service levels and implementation of a cost recovery policy that balances affordability considerations and sustainability imperatives while facilitating an equitable access regime, writes Anand Madhavan.

The average water tariffs in urban India continue to be low relative to costs, even as affordability concerns constrain meaningful progress on cost recovery. As utilities struggle to recover even their operating costs, efforts to raise revenues have often tended to narrowly focus on user charges. Fixing water pricing is not just a matter of introducing some user charges here and raising a few taxes there. It needs to be tackled concurrent with improvement in service levels and implementation of a cost recovery policy that balances affordability considerations and sustainability imperatives with focus on shifting from an equal (and low) tariffs – inequitable access regime to a differentiated tariff – equitable access regime.

Recent efforts notwithstanding revenues of urban water supply systems fall woefully short of their costs. Urban water supply systems recovered only about 30-35 per cent of O&M costs vis-a-vis 100 per cent O&M cost recovery targeted under JNNURM and reiterated in the Draft National Water Policy 2012. With a large section of society having genuine difficulties in paying full cost of water and sanitation services, urban water pricing has become a complex challenge to tackle. At the same time, it is true that several developing nations in Asia and Africa having similar affordability challenges have moved ahead with several faring better than Indian cities on operational and financial parameters.

No Indian city has achieved 24×7 supply yet. With a few exceptions, water supply is un-metered and losses are upwards of 50 per cent. The situation is even grim in wastewater treatment where less than 30 per cent of wastewater generated is treated and cost recovery levels are even poorer. A vicious circle of under-investment, poor service levels, poor cost recovery and weak water utilities has led to expensive coping mechanisms (tankers, bubble-top cans, deeper and deeper bore-wells) becoming main stream and this has made water supply exclusive and inequitable. As the HPEC report (and several other studies) point, the poor end up bearing the brunt, an outcome that is opposite of what policy should have achieved.

Efforts to correct water pricing in this backdrop have tended to often focus narrowly on levy and revision of user charges without adequate attention to service delivery commitments and tacking affordability considerations squarely.

Moving to a reasoned dialogue for sustainable water pricing will require a more holistic approach and actions by water utilities (supported by state and national governments) along four areas namely, Set and meet threshold service delivery commitments, Track and disseminate information on financials, Articulate and implement a cost recovery policy that balances affordability considerations and sustainability imperatives and, Address the entire water loop and tackle cost recovery and sustainability of water and wastewater management in totality.

Track baseline service levels; set/disseminate threshold service delivery commitments: While it is true that costs of managing water supply increase year after year, convincing users to absorb these increases is impossible unless threshold service level commitments are defined, articulated and met. The notification of Service Level Benchmarks (SLBs) and follow-up support by the Ministry of Urban Development, Government of India, the efforts by states and cities to implement Information Systems Improvement and Performance Improvement Programmes are steps in the right direction. However, water utilities have tended to report service levels at the level of a city (we supply 300 MLD of water/135 LPCD) without capturing and reporting information at a user/ward/zone levels. This tends to hide real problems and inequity in supply. Tracking and reporting gaps in service delivery vis-a-vis targeted service levels benchmark norms at a granular level and setting time-bound improvement commitments on service levels is critical to build trust and credibility among users. As a first step, water utilities should move towards disseminating ward level service levels on coverage, frequency and mode (tanker, piped supply etc) of supply on their website. Creating a database of all existing users including unauthorised connections is another critical intervention that needs to be done upfront. For instance, following a customer survey, Mysore City Corporation (MCC) saw a 51 per cent increase in the number of water connections and a 40 per cent increase in reported fee collections between 2010-11 and 2011-12.

Track and disseminate information on costs and financials: To decide ‘what to charge’, it is necessary for water utilities to ‘track and report what is spent’. Budgets of water utilities of some large cities are larger than listed companies. Yet, the financial reporting practices of water utilities are opaque with audited financials of water utilities rarely reported in a timely manner. Websites of water utilities often do not provide even rudimentary information on their source of funds, expenditure incurred and deficits. Ring-fencing of utility accounts at a city level, implementation of accrual accounting in spirit and timely reporting of audited accounts of water utilities are key structural pre-requisites for water pricing reform.

Articulate and implement a cost recovery policy: Utilities need to articulate and implement a cost recovery policy that addresses three aspects. Firstly, there is a need to establish some benchmark for target revenue to be realised from citizens as a percentage of household incomes in the city from an affordability stand point. The initiative to provide 24×7 water supply in Hubli-Dharwad and other experiences have shown that even the poor are often willing to pay 3-4 per cent of their income when assured of good quality service given the significantly higher costs they otherwise incur on coping mechanisms. It may be realistically possible for cities to move beyond JNNURM mandated O&M cost recovery. For instance, larger cities with relatively higher per capita incomes should ideally aspire to move towards full cost recovery in the 5-10 years’ time to enable sustainable financing of creation and maintenance of water infrastructure. Secondly, clarity on the user charges versus taxes requires resolution. In general, user charges levied on volumetric basis tend to tackle equity and efficiency goals better. But, without universal metering, taxes tend to be simpler and easier to administer. A ‘middle path’ option is to have metered tariffs for commercial and bulk users while having user charges for other residential users differentiated on the basis of property taxes or area of property. For instance, Surat city recovers water charges from residential users as part of property taxes while having metering tariffs for its bulk commercial and industrial users. With this approach it reported a 92 per cent cost recovery and 94 per cent collection efficiency. Thirdly and this is crucial, utilities should put in place mechanisms for periodic indexation of tariffs to address inflation.

Address the water loop; tackle water and wastewater management in totality: It is time to tackle the water loop in full including wastewater management. Several cities have expanded their sewerage networks under JNNURM without adequate thought on how to deal with the spike in operating costs that follow. Apart from cost recovery, ability to manage these costs could have fairly negative impacts on water availability and quality, hygiene and health. Several cities in Tamil Nadu have adopted the ‘Alandur’ model to implement sewerage systems where upfront connection deposits meet 15-30 per cent of project costs while user charges and allocated property taxes meet 100 per cent of operating costs and debt servicing costs. Planning for the water loop in full will also provide impetus for sewage recycling and re-use.

Surat is setting up a 40 MLD tertiary treatment plant to meet part of its industrial water demand and has announced plans to increase recycling capacity to 200 MLD in the next few years. With cost of extraction of water increasing (several cities including Bangalore, Chennai and Mumbai get raw water to meet their growing needs from far away), large scale sewage re-use is becoming a necessity from both demand management and financial sustainability perspectives. Fixing water pricing thus needs to be addressed in a systematic manner through a well-articulated cost recovery policy implemented along with wide-ranging reform and focus on citizen centric service delivery improvement.