The Government has tried to tackle the problems in this sector by attempting to increase the supply of water. Such an approach, however, requires massive investments. The Planning Commission estimates that, to make up the huge backlog in the Water Supply and Sewerage sector in the next 10 years, investments of about Rs. 15,000 crore per annum would be required. In contrast, the Eighth Plan provided for a meagre Rs. 5,700 crore for this purpose.

The three major recommendations of the Group seek to address these issues through the participation of the private sector. They are described in the sections that follow.

1. Shift the Focus of Reforms from Expanding the Water Supply to Improving Distribution.

Eliminating the inefficiencies in the distribution system and optimally utilising water resources can significantly reduce the investments required for expanding supply. This will require the following steps:

The water supply boards have neither the financial resources nor the managerial and technical knowledge required to make significant improvements in the water distribution system. Hence, it is necessary to take the assistance of the private sector in improving the system. This will require the following actions:

• Secure private participation through Concession Contracts

Under such contracts, the private partner is given complete responsibility for operations and maintenance (O&M) as well as new investments required. The commercial risks are also passed on. This not only reduces leakages in the system and improves collections, but also completely eliminates the need for any new investment from the government in the expansion and O&M of water utilities.

• Award projects through Competitive Bidding

The Concessions should be awarded through competitive bidding. The main criterion for selection should be the tariff that the bidder proposes to charge, while providing mandated service levels and investment targets.

In the long term, to satisfy the needs of the ever-growing population, the supply of water will have to be augmented. Therefore, the company with the Concession contract, would also need to be responsible for investing in enhancing the bulk supply. However, to bring in competition in capacity construction, an open tender should be floated for the construction of these projects.

Annexure 8.1 provides a case study of the privatisation of a public water utility in Buenos Aires through a Concession Agreement. This has provided clear benefits in terms of improved coverage and lower prices.

Local authorities along with the private partner should strive for better utilisation of available water. This should be achieved by reducing wastage of water through reduction in UAFW and the recycling of water through proper treatment. Recycling will have multiple benefits: improving the quality of discharged water and reusing part of the treated water for applications in industries, watering of parks, etc. In Mexico City, recycled water constitutes 4 percent of supply.

Recycling within industries should be encouraged so that more productivity can be obtained from every drop of water. In the US, on an average, water is used three to four times in industries before it is discharged.

The existing highly subsidised water tariffs do not provide any incentive for conserving water. Even these tariffs are mostly levied as fixed prices, such as the Water Tax or User charges based on the number of outlets.

To promote the conservation of water, it is necessary to introduce rational pricing and user tariffs based on metered supply.

Further efforts to optimise consumption should include:

• Telescopic Charges: This would entail charging higher tariffs at higher consumption levels

• Seasonal Tariffs: This would mean charging higher tariffs in summer.

To attract private investment and knowhow in the water sector and gain the best benefits from such an association, the government needs to create an appropriately structured and well-governed policy. This should be achieved through the following initiatives:

The Central Government should clearly indicate the preferred approach to be used by the State Governments / Water Supply Boards in attracting private participation in this sector.

The Ministry for Urban Affairs needs to develop model contracts which can be used by all the concerned parties.

To regulate the various Concession Agreements, regulatory bodies should be formed at the State level for tariff fixation, setting performance standards and monitoring service standards and capital investment plans.

To make the utility sustainable, the tariffs charged to the customer should be raised to full cost recovery level in a phased manner. Increase in tariffs should be linked to simultaneous improvements in service delivery.

Cross subsidies should be limited to a rational level. This will allow lower rates for domestic users without pushing industrial users to look for alternate and sub-optimal sources of water. Additional subsidies provided to any segment should be reimbursed by the State Government through budgetary support.

The urban water utility to be given out on concession needs to have both the bulk water supply and the distribution assets along with a proper mix of domestic and industrial clients. Water assets should be bundled through the following measures:

• Integrate bulk water supply and distribution assets

For most small cities, the bulk supply of water is done by the State Public Health departments, whereas the O&M is provided by the municipal corporation. For Concessions in such cases, it would be necessary to bunch together the bulk water supply and water distribution assets.

• Create a proper mix of Domestic and Industrial clients

To create a self sustainable utility with necessary cross subsidies to the domestic user, there is a need for a proper mix of domestic and industrial customers. Hence predominantly domestic areas need to be packaged along with neighboring industrial areas.

Annexure 8.2 provides a case study of private sector participation in the Tirupur Water Supply and Distribution Project. As can be seen, control over distribution and revenue collection and rational tariffs have played a significant role in this pioneering initiative.

The Bangalore Water Supply & Sewerage Board (BWSSB) has been unable to keep up with the rapid pace of growth of the city. This has led to a significant shortage of water, especially in the newly developed areas.

The BWSSB has tried to tackle the problem by attempting to increase the supply of water. It is augmenting its present capacity of 600 million litres of water a day (mld) through a 270 mld project estimated to cost Rs. 1,300 crore. In addition, it hopes to attract private investment through a BOT contract with a private company for bulk supply of 500 mld of water.

However, the cost of this water supply is very high, amounting to around Rs. 10/kl as it has to be raised by a height of about 500 m. This is further exacerbated by the high level of unaccounted for water (UAFW), estimated at about 30 per cent.

Furthermore, tariffs have been increased recently to account for debt servicing as well as O&M costs. But, in order to subsidise domestic users, industrial users are subjected to very high water tariffs of Rs. 58/kl, pushing them to look for alternate sources of water such as borewells. In such a situation, it looks extremely unlikely that the BWSSB will be able expand water sources through a BOT contract. In addition, the expansion of the distribution network would require investments of about Rs. 750 crore.

Therefore, the first step towards improving the water situation in Bangalore is to privatise the distribution of water and sanitation services through a Concession Contract. An independent Regulatory Authority should be formed to regulate the operation of the privatised utility and set targets for reduction in water losses and improvement in collections. The investments required for rehabilitating and expanding the distribution network should be met by the concessionaire. The State Government should provide legal support to curb theft of water.

Decreasing water losses would increase the availability of water for distribution. This can help in reducing the massive investments required in expanding water sources. In the medium term, privatisation would lead to improved coverage of water supply and sewerage services, with a likely reduction in tariffs. Once distribution is made efficient, future augmentation of water resources in the long term would also become viable.

To provide the necessary water supply and sewerage services at an economical price and on a sustainable basis, the government needs to take the following action:

• Shift the focus of reforms from expanding the water supply to improving distribution.

• Develop water policy guidelines

• Set up an independent regulatory authority

• Rationalise tariffs

• Bundle water assets.

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Annexure 8.1

Buenos Aires' public water utility has been successfully privatised through a Concession Agreement in 1993, leading to definite improvements in coverage, reliability and reduced prices for water and sewerage services.

Obras Sanitarias de la Nacion (OSN), the government owned water and sewerage utility in Buenos Aires, was producing 3.7 million cubic meters of water a day. Even at this level of production, it served only about 70 percent of the area’s population; sewerage coverage was even lower, at about 58 percent of the population. Poor maintenance led to significant water losses, estimated to be about 40 percent.

The main objectives of the privatisation were to:

The government decided to award the right to provide services under a concession agreement, thus keeping the fixed assets under public ownership. The concession was provided for 30 years, allowing the private player to recoup his investments. The contract was awarded to the bidder offering the largest discount to the existing tariffs. The concessionaire was responsible for expanding the coverage of services and developing sewerage treatment. The targets for coverage implied investments of about US $ 4 billion over the life of the contract.

A new independent agency, Ente Tripartito de Obras y Servicios Sanitarios (ETOSS), was created to regulate the concession contract. The agency was financed through a user fee levied on consumers.

The Concession was awarded to Aguas Argentinas, a consortium headed by Lyonnaise des Eaux-Dumez, which offered a tariff discount of 27 percent. The impact of privatisation has been very positive, as shown by the following facts:

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The Tirupur project can be looked upon as a successful example of private sector participation in the water sector in India.

A Special Purpose Vehicle, New Tirupur Area Development Corporation Limited (NTADCL), was promoted by the Tamil Nadu Corporation for Industrial Development (TACID), the Tirupur Exporter's Association and Infrastructure Leasing & Financial Services Limited, to supply water for industrial and domestic consumption. The Rs. 1,000 crore project is expected to achieve financial closure by March 1999.