Water conservation and pollution control in Indian industries : how to use water tariffs, pollution charges, and fiscal incentives

I 37L2 Water & Sanitation Currents * UNDP-World Bank Water & Sanitation Program WNater Conservation and Pollution Control in Indian Industries How to use water tariffs, pollution charges, and fiscal incentives Ramesh Bhatia, Peter Rogers, John Briscoe, Basawan Sinha, and Rita Cestti  Copyright 1994 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC USA Water and Sanitation Currents is a nonperiodic publication of the UNDP-World Bank Water and Sanitation Program. It is designed to place important new material before water and sanitation professionals in a timely fashion so that the quality of both the ongoing dialog among sector professionals and specific, project related structured learning process can be enriched and enhanced. The UNDP-World Bank Water and Sanitation Program is a joint endeavor of the United Nations Development Programme and the World Bank. The Program has been one of the primary actors in worldwide efforts to meet the challenge of providing basic water supply and sanitation services to those most in need in the developing world. Partners in this venture are the developing countries themselves and the multilateral and bilateral agencies that fund the Program's activities. This document has been produced by the Program's Information Management Group. Material may be quoted with proper attribution. Any maps that accompany the text have been prepared solely for the convenience of readers. The boundaries, denominations, and classifications of maps do not imply, on the part of the UNDP-World Bank Water and Sanitation Program, the United Nations Development Programme, the World Bank Group, or any affiliated organization, any judgment on the legal or other status of any territory, or endorsement or acceptance of any boundary. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed to the UNDP-World Bank Water and Sanitation Program, the United Nations Development Programme, the World Bank Group, or any affiliated organization.  Water Conservation and Pollution Control in Indian Industries How to use water tariffs, pollution charges, and fiscal incentives Ramesh Bhatia, Peter Rogers, John Briscoe, Basawan Sinha, and Rita Cestti iz UNDP-World Bank Water & Sanitation Program  About the authors Ramesh Bhatia was Water Resources Specialist in the Water and Sanitation Division of The World Bank, when this paper was prepared. John Briscoe is Division Chief of the Water and Sanitation Division of The World Bank. Peter Rogers is Professor of the Division of Applied Sciences, Harvard University, Cambridge, Massachusetts. Basawan Sinha is Director of Metaplanners and Management Con- sultants, Patna, India. Rita Cestti is a Research Analyst in the Water and Sanitation Division, World Bank. Acknowledgements We are grateful to Devendra Gupta and Bishwanath Goldar of the Institute of Economic Growth, Delhi, for discussions on methodological aspects of industrial water demand.  Contents Executive Summary I Part I: Rationale for Water. Conservation and Recycling 3 Introduction 3 Evidence of water use savings through conservation and recycling 4 Pay-offs from conservation and recycling 5 Policy options 5 Objectives of the paper 6 Analytic framework for water conservation and recycling 6 The economics of water conservation and recycling 6 General framework 6 Conventional sub-sectoral approach 7 Integrated sector-wide approach 7 The impacts of the various policy tools: Analytical issues and empirical estimates 7 Approach taken in this study 8 Policy simulation at the industrial unit level 8 - Water tariffs and "Cost of Conserved Water" in various sectors 8 Part II: Empirical Analysis in Jamshedpur, India 9 Description of the industrial water sector 9 Water use in Jamshedpur 9 Structure of water markets and prices 9 Water quality issues in Jamshedpur 10 Water quality standards and the current situation 11 Main findings 11 iii  iv UNDP-WORLD BANK: WATER AND SANITATION PROGRAM Effects of water tariffs and effluent charges on plant-level decisions 12 Methodology 12 Empirical estimates of water price elasticity 12 Effluent charges and water demand 12 Simulation of policy options at the TISCO plant 13 Effects of water tariffs at the industrial level 18 Cost of conserved water 18 Water demand function 20 Areas for further analysis 20 Institutional issues 20 Development of an effective regulatory framework 20 Required changes in the current institutional set-up 21 Development of market and private sector participation 21 Use of fiscal instruments 21 Recommendations for World Bank operations 21 For sector policy 21 For project formulation and appraisal 22 Conclusions 22 Notes 23 References 23  Executive Summary Experience in many developing countries demon- trial sector incorporating linkages between the eco- strates that the fragmented "command-and-con- nomic and the environmental aspects of water use. trol" approach to management of water resources The second part of the paper presents an has failed, both economically and environmen- empirical analysis of the industrial sector in tally. In recent years a remarkable consensus has Jamshedpur, India, using the above-mentioned emerged in the World Bank and the development framework for assessing the effects of changes in community at large on the importance of "treating water tariffs and effluent charges on water demand water as an economic good," with specific atten- and effluent discharges. More specifically, two ap- tion being focussed on the use of economic instru- proaches have been used in this analysis. The first ments for the conservation of water and improve- one is a policy simulation at the industrial level, ment in environmental quality. This consensus is which considers the firm asacostminimizating unit reflected in the Dublin Statement emerging from with a given production function. The response the the 1992 International Conference on Water and firm, who has information on technological possi- the Environment, and the World Bank's 1993 bilities and associated costs of conservation and re- Water Resources Management Policy Paper. This use, is simulated in responses to increases in water paper argues that economic incentives and fiscal price and effluent charge. The second approach instruments are essential in achieving efficiency in used in the analysis is a comparison of the the use of water resources. Better economic man- economics of different measures to conserve water agement of water will greatly assist .in improving against the alternative water supply investment. the environment. The main findings of this study are: The first part of the paper presents the rationale * Water prices, effluent charges, and fiscal in- for water conservation and recycling in the indus- centives are effective demand management tools for trial sector. In particular, it emphasizes that the twin improving water quality and managing the use of benefits of lower cost and clean water could be total water resources. However, the application of available only if industrial users are encouraged to these tools needs to be carefully orchestrated. For invest in water conservation and wastewater treat- example, when water prices are low, conservation ment facilities with the help of a judicious mix of and recycling are not attractive options regardless economic incentives and fiscal instruments. The of the level of effluent charges. paper also presents an analytical framework for * The determination of effluent charges and treating water as an "economic good" in the indus- water prices requires information on technological 1  2 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM options, costs of treatment, and consequences of this may provide piped water supply to a signifi- downstream externalities. If such externalities can cant portion of the currently unserved population not be estimated, the clean-up cost required after a without substantial additional costs of trans- particular use may serve as an alternative means to portation and treatment. And last, conservation and assess the likely adverse impacts on water quality. recycling may reduce the amount of liquid effluent * Waterdemandmanagementintheindustrial discharged by the users and may improve water sector can provide several benefits. First, conserva- quality in rivers and streams. tion may reduce costs to society where the marginal * Investment and operational costs of water cost of water supply is rising and the opportunity supply augmentation and pollution control projects cost of water in alternative use is relatively high. will be kept under control when staff working in Second, conservation and recycling may result in the sector start to give enough consideration to savings of up to 80 percent of intake water in demand management options during project industrial units. If diverted to domestic supplies, preparation.  Part I Rationale for Water Conservation and Recycling Introduction termination of water tariffs, and there are no pollu- tion taxes and/or effluent charges to be paid by Although the industrial sector accounts for only 10 polluters. As a result, excessive quantities of water to 15 percent of aggregate annual water demand in are used and excessive pollution is produced. These developing countries, water is a critical input for pollutants have major environmental and health process and cooling requirements in many major in- effects particularly in areas where pollution loads dustries. As documented in case studies from are high compared with the low-flow in rivers in Nigeria and India, water shortages, unreliable some months. supplies, and high prices adversely affect the expan- In view of the conflicts in the use of water and sion of small and medium industries, resulting in the excessive pollution of surface and groundwa- loss of employment opportunities for the poor.' In ter sources, new supplies have to be obtained from a number of regions in India (Madras, Hyderabad), long distances (ranging between 50 to 180 kilo- China (Beijing, Tianjin), and Indonesia (Jakarta), meters in metropolitan areas in many countries) in- and countries in the Middle-East, shortages in water volving high investment costs in pipeline transpor- supply and increasing prices are emerging as one of tation and pumping of water. Both the quantity and the major constraints in growth of industries. quality problems mean that the costs of supplies of Despite the overall shortage of water, there are adequate quality are rising rapidly with the cost of no incentives for efficient use of water in large and a unit of water from the "next project" often being medium industries in many regions. This is because 2 to 3 times the cost of a unit from the "current most developing countries have not developed project." Hence, in many situations, water conser- instruments (either regulations or economic incen- vation and recycling are more cost-effective than tives) and related institutional structures for inter- investments in increasing water supply. Further, in- nalizing the externalities which arise when one user vestments in water conservation, recycling and affects the quantity and quality of water available reuse provide environmental benefits over and to another user. Industrial water tariffs are based above the economic benefit of lower costs since on average cost pricing rather than marginal cost these result in reduction in pollution loads. Thus, pricing and ignore the opportunity cost of water water conservation and recycling in the industrial (i.e., benefit foregone in alternative use). Similarly, sector provide opportunities where there is no con- the effects of damages caused by industries in pol- flict between the objectives of economic efficiency luting surface and groundwater are ignored in de- and environmental improvement. 3  4 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM Box 1: Definitions on water conservation and recycling hne literature on water conservation and recycling tends industrial plants, this may require substantial invest- to confuse the issues between conservation and recy- ments in process change or method of using cooling cling. There is a need for concise definitions on several water (e.g., cooling towers in place of cooling ponds). terms used in the literature. Temporary conservation. There are two distinct types Demand management of temporary conservation. First, there are those meth- ods that rely entirely upon the willingness of consum- There are several ways to manage the demand for wa- ers to cut-back water use in response to exhortations. ter, and taken together they are referred to as "demand This approach seems to work quite well during drought management."Thedemandforwatercanbecurbedby periods for domestic water supply. The second major price increases, quantity limitations, and conservation. way of carrying out temporary conservation is by man- Given the fact that wastewater is a direct consequence agement and regulations that do not rely upon perma- of water use, it is also possible to curb the demand for nent adjustments to the flow regimes. Such methods as water by curbing the ability to discharge wastewater. pricing, quotas, pressure reduction, and seasonal lawn The ways to manage the "demand" for wastewater, and watering restrictions are part of this type of conserva- hence, the demand for water on the intake side, are tion. The amounts of conservation achieved by this ap- roughly similar to those used on the intake side, namely; proach depends upon the continued application of the pricing effluent, effluent limitation, and conservation. management and regulations or the water use will rise to its previous levels unless the user perceives this as a Conservation long term situation and, therefore, adjusts with perma- nent measures. Conservation covers all methods of conserving water for further use. Conservation also has the effect of re- Recycling ducing the amount of water discharged by the user as effluent, but.the concentration of the wastes may be Recycling water in a factory, or other premises, con- higher and the amount of water "consumed" byevapo- serves water. However, recycling differs from conser- ration may be lower. There are two different ways of vation as defined above in that while the actual amounts dealing with conservation: permanent conservation and of water used may be less than without recycling, the temporary conservation. evaporation losses may increase with increased recy- cling. Withdrawal declines much more rapidly than Permanent conservation. This method relies upon in- consumption, in fact consumption may not be affected stalling water saving devices on the inlet side of water- by recycling. Similarly, while the total effluent load may using appliances and processes. For domestic purposes be less, the actual concentration of the wastes in the it appears that there are large inefficiencies in the ap- effluent may be considerably higher. These factors need plication of water and, hence, low-flow shower heads to be carefully considered when analyzing the and toilets can typically more than halve water use. In desirability of recycling. Evidence of water use savings In a number of cases in developed and devel- through conservation and recycling oping countries, it has been demonstrated that regu- lation combined with pricing and tariff policies Conservation relies on installing water saving de- have resulted in savings (through conservation and vices and process changes so that water consumed recycling) ranging between 20 percent to 30 percent through evaporation and seepage losses is reduced or more. In industrialized countries, demand for without reducing output. Recycling refers to using water does not increase with industrial output due a cubic meter of water more than once with or with- to changes in processes, technology, mix of indus- out treatment and recycling it for meeting process trial output and increased recycling of liquid efflu- or cooling requirements (Box 1). Both conservation ent. In some OECD countries, industrial water use and recycling result in reductions in the volume of in the year 2000 will often be 50 percent less than it water purchased or withdrawn from own facilities. was twenty five years earlier. According to Postel, They, in turn, reduce the amount of effluent dis- in manufacturing industries in the United States, charged, but the concentration of pollutants may the number of times each cubic meter of water is be higher. used has gone up from 1.8 in 1954 to 3.4 in 1978. In  Water conservation and pollution control in Indian industries 5 the United States, between 1955 and 1985, indus- * Conservation will reduce costs to society trial water withdrawal per dollar of value-added where the marginal cost of water supply is rising (in constant 1975 dollars) has declined from 0.76 and the opportunity cost of water in alternative use cubic meter to 0.54 cubic meter. is relatively high. There are a number of examples where admin- * Conservation and recycling could result in istrative and legislative measures such as licenses, savings up to 30 percent of water used in industries quotas on water use and effluent discharge, and which, if diverted to domestic supplies, could imminent water shortages accompanied with high provide piped water supply to a significant portion water tariffs have resulted in savings ranging be- of the currently unserved populations in urban tween 40 percent to 70 percent in industrial water areas without substantial additional cost of trans- consumption: portation and treatment.2 * In Israel, between 1962 and 1982, the aver- * Conservation and recycling will also reduce age amount of water consumption steadily declined the amount of water discharged by users as efflu- from 20 cubic meters per thousand Israeli pounds ent and would improvewater quality,inrivers and/ of value of output at fixed prices to about 6 cubic or streams. meters. A 300 percent increase in value-added of industrial output was achieved with only a 20 Policy options percent increase in water consumption. * In Tianjin, China, economic, administrative However, the benefits of lower costs and clean and legislative measures resulted in a decrease of water would be available only if the industrial us- industrial water use from 360 cubic meters per ers are encouraged to invest in water conservation 10,000 Yuan of gross production value in 1981 to and waste water treatment plants with the help of 145 cubic meters in 1988, which represents a reduc- a judicious mix of regulatory policies, economic tion of 60 percent of industrial water consumption incentives, and fiscal instruments. The options per unit of industrial output value. In Beijing also, available to the policymakers are: between 1978 and 1984, the decrease was from 880 * Legislation and regulation indicating the wa- cubic meters per 10,000 Yuan of production value ter quality standards for rivers and lakes, for efflu- to 335 cubic meters. ent discharged into water bodies, and for provid- * In India, a fertilizer plant at Goa, over a six- ing the machinery for implementation of these year period from 1982 to 1988, reduced water con- regulations. sumption by 50 percent as a response to the high * Quantitative restrictions (quotas) on water price of water and the government pressure to re- consumption and/or effluent discharged by each duce industrial effluent discharged into the sea. In industry or a group of industries. Madras, the Madras Refineries Limited doubled its * Influencing the behavior of industrial firms capacity to 5.6 million tones per year keeping con- by selecting appropriate levels of water prices, ex- sumption of water unchanged at 2.5 million gallons traction charges, effluent charges and pollution taxes. per day. Similarly, Madras Fertilizer Limited has * Providing tax benefits, investment support, or maintained its capacity while reducing water us- soft loans for investments in effluent treatment age from 4 million to 3.6 million gallons per day, plants installed by a single unit, by a group of in- * In Sao Paulo, Brazil, three industrial units dustries, or by a municipality for common treat- that were asked to pay effluent charges to the cen- ment facilities. tral effluent treatment facility resorted to reduced Experience in many developing countries has water consumption. Reductions in unit consump- shown that the "fragmented, command-and-con- tion ranged from 42 percent to 62 percent in 1982 trol" approach to management of water resources over 1980. has failed, both economically and environmentally. Hence, there is a need to use economic incentives Pay-offs from conservation and recycling and fiscal instruments in achieving economic effi- ciency in the use of the resource. Further, it is also Industrial water demand management, i.e. conser- necessary to show that better economic manage- vation and recycling, can have notable payoffs as ment of this resource will greatly assist in improv- follows: ing the environment. The objective of this paper is  6 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM to demonstrate, with the help of an empirical case gram water is brought in from outside, is pumped study, the role of economic incentives such as wa- from the industry's own wells, is mixed with recycled ter tariffs, effluent charges, and tax or subsidy water, and is introduced into the industrial process. mechanisms in achieving the twin benefits of eco- In the process, a fraction of the water is lost either to nomic efficiency and environmental quality. evaporation or to its incorporation into the product. The remaining water is disposed of directly as waste- Objectives of the paper water, recycled directly, recycled after treatment, or treated and disposed to the outside environment. The The objectives of this paper are: choice of how much to bring in from outside, how * To present an analytical framework that ex- much to treat, and how much to recycle depends on plicitly considers linkages between economic and the costs of water supply, waste treatment, and the environmental aspects of water use in industries. level of regulation imposed upon the industryby local * To use this framework for assessing the ef- or national authorities. Figure 2 gives a schematic of fects of changes in water tariffs and effluent charges the view of the same industry from an external point- on water demand and effluent discharge in the case of-view, such as by a regulator or a municipal of selected industries. authority might take. In this case the parameters of * To draw generic conclusions regarding the concern are how to settheprices of the water supplied, efficacy of using economic incentives instead of and the level of effluent allowed from the various "command-and-control" mechanisms in improv- sources or the setting of effluent and sewer charges. ing water resources management. In Figure 3, the regional case of multiple industries in a river basin which have the option of treating, recy- Analytic framework for water cling, and using municipal sewers is outlined. The conservation and recycling setting of effluent charges should be directly related to the environmental damages caused by the several Water is an important input to all industrial pro- polluters, and these are clearly related to their loca- cesses. Even though water is a unitary resource, it tions in the river basin. is available at many different levels of quality. Most industries try to match the water used by its qual- The economics of water conservation and recycling ity and suitability for specific parts of the industrial process in question. Also the effluent produced by GENERAL FRAMEWORK. Economic theory implies industrial processes are of widely differing qual- that efficient use of resources takes place at that level ity. Typically there is a hierarchy involved with of water use where the demand curve intersects the higher quality water being useable for all lower supply curve. At the point of intersection two quality uses; to recycle water after use, therefore, important pieces of information are available; the usually requires some sort of treatment. price at which the resource use is efficient and the Figure 1 shows a hypothetical water supply and correct quantity to use. Knowledge of either piece waste disposal system for a single industry. In this dia- of information should be sufficient to lead a con- sumer to an efficient solution. Figure 1: Single industry water use Figure 2: Single industry water use (industrial's point of view) (municipal/others' point of view) EVAPORATION AND To STREAM OR LOSS TO PRODUCT -------------------R U D A E - -- -- - - - -- - - - --- - - - - - - -- - -- - ---GROUNDWATER PURCHASED UNTREATED To SEWER WATER PRODUCTION EFFLUENT SOLD WATER UNTREATED EFFLUENT ls l I l ll rTO STREAM OR GROUNDWATER TREATED RECYCLE EFFLUENT TREATED EFFLUENT I OWN SUPPLY - I  Water conservation and pollution control in Indian industries 7 CONVENTIONAL SUB-SECTORAL APPROACH. The con- regulating with the creation of a free market for the ventional sub-sector approach to industrial water permits. We say "almost," since a regulatory insti- supply and recycling is that shown in Figure 1 and tution will have to monitor the system to ensure that to a lesser extent in Figure 2. For Figure 1, the ac- there is no cheating. counting stance is that of the individual profit- maximizing firm. There are several different con- INTEGRATED SECTOR-WIDE APPROACH. In order to at- ditions under which this system can function. tain the economic efficiencies made possible by * The first case is where the industry is only water pricing policies and effluent charges a wider charged for the water it purchases, and there are approach must be taken than simply one industry no other charges or regulations imposed upon or group of industries. Efficient pricing requires that the firm. This-situation is rapidly disappearing the true marginal costs be used and that the throughout the world as environmental awareness opportunity costs and externalities be properly develops. accounted for. It is only possible to do this by con- * A more typical situation occurs where the sidering a wider group of industries and activities. firm is charged for water and is faced with some One needs to consider a system wide enough to restriction on the amounts and types of pollutants include all of the external effects. It is generally that it emits. considered that a region of at least the size of the * A more restrictive situation is where the firm river basin be used for such calculations. This is the now is not allowed to emit any untreated effluent, idea behind the sketch in Figure 3. This approach but may emit a certain volume of treated effluent. will make it possible to explicitly consider economic * Another variant on this scheme is that the and environmental linkages among user sectors firm is allowed to discharge untreated effluent up such as agriculture, industry, power plants, house- to a certain concentration level free to the munici- holds, and commercial establishments. The eco- pal sewer for treatment with a surcharge for any nomic linkages would require that while setting effluent above that particular "strength." tariffs in one sector, for example industry, the op- * Finally, effluent permit trading schemes portunity cost of water (or benefits foregone in al- have been implemented for air pollution and only ternative use such as irrigation) is taken into ac- rarely for water pollution. The polluters are count. This would also require considerations of awarded effluent permits for a certain amount of encouraging water conservation in agriculture and effluent, calculated by a regional authority to be the transferring saved water into industrial uses; and the total amount of effluent that can be tolerated by the effect of conservation and recycling in one use on the system (characterized by Figure 3), and they can return flows and availability of water for other uses.3 either treat their own wastes or purchase effluent The environmental linkages require that qual- permits from those industries that are efficient ity considerations in the use of water by different waste treaters. In this way the system is almost self sectors should be explicitly analyzed.4 This would require estimating the damages caused by one user, Figure 3: Multiple industries for example industry, to other users such as domestic on river and sewer systems water supply or agriculture. Further, the effects of water pollution on aquatic life, wild life and en- \ - - - /vironmental quality have to be explicitly evaluated. \ River / - 2/The impacts of the various policy tools: \River e -- - 'i/rAnalytical issues and empirical estimates \ / _ , / There are four elementary policy tools for ration- , _l -, -\ - f N,/ SEWER ing water. They can be broadly classified into "pric- ing" and "quantity" tools. Table 1 shows them sche- River matically arrayed by their implied economic STP efficiencies. Table 2 shows how this simple classifi- 1: Industrial unit cation scheme could be applied to the range of Sewer treatment plant policy tools available for implementing water con-  8 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM Table 1: Four elementary water rationing tools POLICY SIMULATION AT THE INDUSTRIAL UNIT LEVEL. Economic At the industrial unit level, the approach adopted efficiency level Price of water Quantity of water is to consider the firm as a cost minimizing unit with High Volumetric pricing Auctioning water rights a given production function. The management of Low Flat rate pricing Water rights quotas this unit has information regarding technological possibilities and associated costs of conservation of Table 2: Policy tools for water conservation water, treatment of effluent, and the cost of recy- and recycling in industry cling treated water. Since one of the major steel Economic plants in Jamshedpur, India, accounted for over 90 efficiency percent of the total water intake and effluent dis- level Watersupply Industry Wastewater charged, a policy "simulation" exercise has been High Volumetric pricing Tax incentive Effluent carried out. The purpose of the exercise is to "simu- taxes late" the response behavior of the management of Low Flat rate pricing Water-use Effluent the firm to the following policy instruments: standards standards * Increase in the price of water purchased or the cost of water intake from its own sources; servation and recycling in industry allowing for * Increase in the effluent charges that may have effluent regulation as well as water inputs. to be paid by the firm to the municipality or the Dale and Dixon show that if demand is uncer- government for untreated effluent discharged in tain, price rationing is preferred when the elastic- the river; and ity of demand is greater (in absolute value) than the * Subsidies or soft loans for effluent treatment elasticity of supply. Price instruments minimize plants. welfare losses. In other words, when marginal ben- efits are flat relative to costs, mistakes in quantity WATER TARIFFS AND "COST OF CONSERVED WATER" IN instruments will tend to miss the correct "price" by VARIOUS SECTORS. Under this approach, the concept a wide margin and result in large welfare losses. of "cost of conserved water" (CCW) will be used to compare the economics of different measures, Approach taken in this study e.g., recycling, reduction of leakage, more efficient processes, against alternative supply investments.5 The empirical analysis in this paper uses the follow- This comparison will be made across users in the ing approaches: (i) policy simulation at the indus- industrial and the domestic sectors after taking trial unit level; and (ii) analysis of water tariffs and into account the cost of distribution of water to "cost of conserved water" in various sectors. each user.  Part 11 Empirical Analysis in Jamshedpur, India Description of the industrial water sector lic Health and Engineering Department of the Gov- ernment of Bihar, PHED), and self-provisioning Water Use in Jamshedpur through borewells and tankers. TISCO supplies water to its own steel plant as well as to associated Jamshedpur, in eastern India, is known as the "steel companies while PHED supplies are mainly avail- city" because one of the oldest steel mills in India able to industrial units in Adityapur. TISCO ac- (Tata Iron and Steel Company, TISCO) is located counts for 96 percent of the total water intake by there. Over time, a number of associated compa- industries, while the share of PHED is only 3 per- nies of the Tata Group have been established along cent. Thus, TISCO is not only the major supplier of with a number of ancillary units. In the metropoli- industrial water but is also its major user account- tan area, there are 13 major industrial units, 16 ing for 88 per cent of total intake. The other major medium industries and 472 small industrial units. users are Tata Engineering and Locomotives (4.2 As shown in Table 3, total water withdrawals by percent), Tin Plant Company (1.6 percent), TISCO- these industrial units in 1990 were estimated at 57.5 Agrico (1.3 percent), Usha Martin (0.4 percent), and million cubic meters (MCM). An additional volume Steel City Beverages (0.6 percent). of 66 MCM of water was treated and distributed TISCO pumps water from the Subernarekha for domestic and institutional uses. Currently, river for using in its own plant and selling to its water is pumped free of cost from the Subernarekha associated companies. The unit cost of pumping river and there is no allocation for agriculture. A water has been reported as Rs 0.68 ($0.066) per cubic reservoir near Jamshedpur is under construction meter inclusive of the amount paid to the Irriga- and will supply water for irrigation to 82,000 tion Department for water released from the hectares of land in the region. The estimated Getalsud reservoir upstream of Jamshedpur.7 irrigation requirements in the command area of this TISCO charges Rs 1.68 ($0.066) per cubic meter of reservoir are 720 MCM per year. raw water to its associated companies. Although TISCO is supplying water to the as- Structure of water markets and prices sociated companies at $0.066 per cubic meter, its cost of operation and maintenance is estimated to As presented in Table 3, in the Jamshedpur region,6 be around $0.03 per cubic meter. At this low price, there are three sources of industrial water supply: there is no incentive for TISCO to economize on the a private company (TISCO), a public agency (Pub- use of water. For example, TISCO generates nearly 9  10 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM Table 3: Water supplies and prices and Steel City Beverages), and a large number of for industrial units in Jamshedpur small industrial units in the Adityapur area. Total Average Three medium industrial units, two dairies and intake Percent price Water supply (MCM) (%/_) ($/m3) one beverage company depend partly on their own Private sector company (TISCO) 55.6 96.4 0.066 supplies where its share ranges between 4 percent Public agency (PHED) 1.9 3.3 0.021 to 60 percent. The average cost of pumped water is Self-provisioning/borewells 0.2 0.3 0.133a reported as $0.133 per cubic water, about six times Tankersb 0.1 0.140 the price charged by the PHED. One unit in Total 57.7 100.0 Jamshedpur also purchases 20,000 cubic meters or a. Prices vary between $0.10 and $0.22 per cubic meter. one-third of its requirement from private tankers b. Less than 0.1 percent ot the total. n-hroflSeqrmntrmprvetaks at a price of $0.14 per cubic meter. Thus, marginal 1.64 MCM per year of wastewater from its coke cost of industrial water supply is quite high, more oven plant having high levels of phenol and am- than twice that of the average price charged by monia. Since the investment cost of a installing TISCO. Hence, the willingness-to-pay of industrial phenolic waste treatment plant is about $4.0 mil- users for additional quantities can be taken as $0.133 lion, this treatment plant has not been set up yet. per cubic meter. Instead, dilution of wastewater is done by using 5 MCM of freshwater to bring the levels of pollutants Water quality issues in Jamshedpur to a reasonable level (even though it does not meet the specified standards).8 In Jamshedpur, almost all the industrial units are The PHED also supplies water to the Adityapur currently putting their industrial effluent practi- Notified Areas (deemed municipality) from a small cally untreated in the Subernarekha river or its dam as well as from deep tubewells. In 1990, PHED tributaries.9 TISCO accounts for almost 90 percent supplied around 1.83 MCM of water to industries of the total industrial pollution in the region. The at a fixed charge of Rs 2.5 per thousand gallons other contributors to water pollution were TELCO ($0.021 per cubic meter), which is about one-third (3 percent), and other major companies in Jam- of the price charged by TISCO. shedpur contribute about one percent each. Al- Further, the PHED sells water at $0.021 per though a part of the municipal sewage is treated, cubic meter to industrial units as compared with it is not recycled for industrial uses because fresh its estimated cost of $0.06 per cubic meter based water is available at a low cost (without paying upon depreciation, operation and maintenance (ex- any abstraction charges for pumping water from cluding capital costs). This implies a subsidy of Rs the river). The status of industrial effluent dis- 1 million per year (or about one-sixth of its total charge in Jamshedpur is shown in Table 4. In annual expenses) to industrial consumers. The Adityapur, the industrial waste is discharged into major beneficiaries of this subsidy are two major open drains and ultimately discharges into the units (Usha Martin of Birlas and Tata Yadogawa), Kharkai river, which is the main tributary of the four medium units (including Jamshedpur Dairy Subernarekha river. Table 4: Status of industrial discharge Type of Outlet Receiving Firm waste point Pollutants water body TISCO Acidic waste from pickling plant Jugsalai Nala pH Kharkai/Subernarekha Fly ash laden Ram Mandir Nala SS do. do. Garam Nala do. Subernarekha From coke oven and blast furnace Susangarhia Nala Phenol, SS, Oil, Grease do. Ammoniacal, Nitrogen TELCO From electroplating section, Kumaria Nala Cyanide, pH, Grease, Oil, do. pickling wastes Chromic Acid Tin plate From tinning plant and pickling Open Drain to Hexavalent Chromium, do. Subernarekha Acid, SS, Oil, Grease Others Pickling plants and waste from do. Oil and Grease, Acid, SS do. washing  Water conservation and pollution control in Indian industries 11 Since the introduction of the Water Prevention In assessing the quality of water in Suber- and Control of Pollution Act in 1974, large- and narekha, the degree of deviation of its concentra- medium-size industries have started installing tion from the standard tolerance limits set for treatment plants for water pollution abatement. In different uses has to be taken into account. The the case of small-scale industries having small ef- water quality data about the minimum and maxi- fluent loads of complex nature, it is not always mum range of different water quality parameters possible to have the proper effluent treatment plant. for the Subernarekha and Kharkai river show that: For example, in the case of Adityapur where there * The minimum dissolved oxygen (DO) level is a big cluster of small-size industries, installation downstream of Jamshedpur has gone down to 2.0 of combined effluent treatment plants is considered mg/l which indicates that the water is unfit for advisable. normal aquatic life. The quality of effluent from each industry has * The minimum value of the biochemical oxy- to conform to certain standards as laid down by the gen demand (BOD) in almost all the sampling sta- Bihar State Pollution Control Board and the Depart- tions is about 1.0 mg/l which is well below the ment of Environment and Forest. In order to exer- stipulated level of 3.0 mg/l. cise a check on the effluent quality, monthly sam- * The maximum range of faecal coliform pling and analysis of the effluent from different (92,000) is much higher than prescribed for desig- industries is done by the Bihar State Pollution Con- nated uses. This is an indication of faecal pollution trol Board. Industries firma are also required to throughout, right from Chandil Bridge to Galudih install their own water testing laboratory and check Barrage and also in the Kharkai river. on the quality of effluent through regular testing. * The maximum observed level of nitrate is They are also required to submit monthly analysis also higher than the standard, particularly in reports to the State Pollution Control Board. As Kharkai river, which also suggests nitrate pollution. evident from the information provided in Table 4, it seems that not much success has been achieved Main findings in pollution control. The above analysis shows that: Water quality standards and the current situation * Industrialwatertariffsaredetermined onthe basis of average cost of transportation and pumping As a result of the indiscriminate discharge of pol- and ignore the opportunity cost of water in luted effluent into the rivers, water quality has alternative use. If water tariffs were to include become unfit for drinking supply, aquatic life, and benefits foregone in alternative use such as in recreation purposes. This problem is very serious irrigation, they would have to increase by about because during the eight dry months from one-third, i.e. from $0.066 to $0.093 per cubic meter. October to May, the mean flow near the mouth of * Water tariffs do not reflect the fact that the Subernarekha is not sufficient to dilute industrial users adversely affect the quality of water pollution to acceptable limits. Table 5 compares in such a way that downstream users suffer the river flows and effluent discharges at the damages to their health, or have to incur high costs confluence of the Subernarekha and the Galudih in treating water before using it. If costs of water barrage for the dry months. It shows that the treatment were to be included in water tariffs, the maximum ratio of effluent discharge to river flow water prices would increase by about 100 per cent. is only 1 to 5. * InJamshedpurand neighboring areas, water tariffs for industries do not internalize the Table 5: River flow versus effluent externalities which arise when one user affects the discharged at Galudih Barrage quantity and quality of water available to another. (cubic meter per second) As a result, from an economic viewpoint excessive Description March April May quantities of water are used, and excessive pollution Flow in river 9.48 6.94 8.06 produced. For example, the TISCO's water intake Effluent discharged rate per ton of steel of 24 cubic meters per ton of Domestic 0.80 0.80 0.80 steel is much higher compared with 8 to 10 cubic Industrial 1.05 1.05 1.05 meters used by other steel industries in India.  12 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM Effects of water tariffs and effluent (10) L = L (PI' PK' PM' Pe' Pwf Pww; Q) charges on plant-level decisions (11) K = K (P1' PK' PM' P 5Pw Pww; Q) (12) M M (pI,PK.PM',P,PWJPWW; Q) Methodology (13) e e (pI, PK' PM' PI' PW, PWW; Q) (14) W = W (PI, PK' PM' Pe' Pw PWW; Q) The approach used in this study is based upon that of classical sub-sector economic models best and exemplified by Kneese and Bower, Russell and Vaughn, and Sims. Under this approach the firm is (15) WW = WW (p,, PK' PM' P, PW. PWW; Q) considered to be a cost minimizing unit with a given production function. The goal of the firm is to The three demand functions that are of minimize the total cost of production subject to the particular interest to us are (13), (14), and (15). For production function and, possibly, to other con- example, the demand for water supply, equation straints imposed by environmental regulations. (14) can be simplified by assuming that it is Let the production function be: relatively insensitive to the prices of labor, capital, and materials. It then becomes: (1) Q = Q (L, K, M, e, W, WW) (16) W = W (Pe' P., Pw; Q) Where: Q = Total output L = Labor used in production In other words, water demand is a function of K = Capital used in production both the water price and the price attached to the M = Inputs used in production except effluent (and implicitly to the concentration of the water wastes emitted). This is a theoretical demonstration e = Effluent released outside of the plant of what Miglino and Harrington, Elliot, and others W = Water used in the process mentioned below have demonstrated empirically. WW = Wastewater treated EMPIRICAL ESTIMATES OF WATER PRICE ELASTICITY. A and the total cost of production is: few studies are available on industrial water demand that relate water consumption with out- (2) TC = pLL + PK + pMM + Pe + PW+ PWWW put, price, employment and type of technology used. Williams and Suh have examined the effect Where: TC = Total Cost of price on industrial water demand by using three P7 = Price of the ith input or cost of output; alternative price measures (average revenue price, e.g., pw means price of water bill price, and marginal price). The results of this and other studies are summarized in Table 6. The Minimizing (2) subject to (1) gives the following first values of water price elasticity reported in Table 6 order conditions: are higher than the estimates of price elasticity obtained for residential and commercial demand, (3) P, - M6Q/8L = 0 e.g.,residentialpriceelasticityrangesbetween-0.48 (4) PK - X8Q/dK = 0 and -0.18. Industrial demand for water is more price (5) PM - m6Q/1M = 0 responsive than residential and commercial (6) P,- X5Q/1e = 0 demand. The relatively high price elasticity of (7) PW- X6Q/1W = 0 industrial water demand reveals that industrial (8) PWW - X5Q/6WW = 0 customers are more likely to find alternative sources of supply or to recycle water in the production and process in adjusting to price changes. (9) Q = Q (L, K, M, e, W, WW) EFFLUENT CHARGES AND WATER DEMAND. Sims examines the process of selecting between a sewer Solving (3) through (9) for L, K, M, e, W, WW gives charge system based upon charges above some the following demand functions: threshold or normal level, and a "pure" effluent  Water conservation and pollution control in Indian industries 13 charge system based upon the total volume of Simulation of policy options at the TISCO plant discharged effluent. The author finds that the former system, which is the current approach used For wastewater management in the steel industry, in North America and parts of Europe, introduces Russell and Vaughan present an elaborate model significant undesirable economic incentives leading for a typical steel mill based upon U.S. data from to consuming more water than would otherwise be plants in the Delaware River Basin. The developed the case to dilute the wastes than with the latter model is a cost-minimizing mathematical pro- system. The sewer charge system provides a gramming model that meets production goals and positive subsidy to firms for using the capacity of constraints upon the effluent. This study is a the municipal treatment plant. Sims also reports the benchmark for process/residuals management case of a Canadian industry where the welfare loss models and is one that could be applied to the steel due to this "supraoptimal" use of water induced a industry in Jamshedpur. Ideally, we would con- 50 percent increase in the volume of water used to struct such an optimizing model of the TISCO plant carry waste away. and derive equation (16) from its solution. Un- Elliot considers the choice between a BOD fortunately, the detailed data to perform this were surcharge system and a system relying on water not to hand. It was therefore decided to simulate and normal sewer charges. The latter system has cost minimizing behavior on the part of the steel been reported to work quite well in managing the industry in Jamshedpur to decide upon using the demand for water in several food processing in- available water investment choices. In particular we dustries. Table 7 shows the price elasticities of both have chosen to focus upon the operations of the water demanded and effluent produced to increases TISCO plant. in the price of water and in the sewer surcharge. Since TISCO plant accounts for over 90 percent of the total water intake and effluent discharged in Table 6: Price elasticity for Jamshepur, the policy "simulation" exercise can be industrial water user groups assumed to cover the entire water supply of Investigator Price elasticity Comments Jamshedpur. The purpose of the exercise is to Williams and Suh -0.721,-0.43, For the average price, "simulate" the response behavior of the man- (1986) -0.72 to -0.98 the marginal price, and agement of the company to the following policy the bill price, USA instruments: Ziegler (1984) -0.98 Paper and chemical . Increase in the price of water purchased or plants, USA. Average the cost of water intake from its own sources. Leone et al -0.96, -0.77, Chemical, petroleum * Increase in the effluent charges that may (1974) -0.88 and steel industries have to be paid by the firm to the municipality or respectively, USA. the government for the effluent discharged in the Rees (1969) -0.958 Chemical water use, river. UK. - Financial incentives (subsidy or soft loans) Ridge (1972) -0.30 and -0.60 Brewing and fluid milk for effluent treatment plants so that treated water plants, USA.caberccewihntepn. Gupta and Goldar -1.32 Cross-section data for can be recycled within the plant. (1991) cotton, textile, paper, The TISCO plant water usage has been dairy product, ball- conceptualized by the flow diagram in Figure 4. bearing, and distillery, India (1 983-84). Sixty percent of the losses are assumed to take place Metaplanners -0.45 Steel and related in the cooling part of the process. TISCO is assumed (1992) industries, India. to be facing the supply curve for water given in Table 8. (Unit cost is estimated as the sum of annualized investment cost at 12 percent plus Table 7: Elasticities for water and effluent operationand maintenance costs). All of theeffluent charges in the food processing industries from the different treatment processes of Table 8 Reduction in Reduction and the recycled water are considered to be of Increase in water use in BOD equivalent quality; in other words the water BOD surcharge 0.44 0.51 recovered by any one of the processes can be used Water and normal sewer charge 0.63 0.75 for any other purpose.  14 UNDP-WORLD BANK: WATER AND SANITATION PROGRAM Table 8: Unit cost and quantities of water conserved and recycled by various processes Quantity Unit cost Investment cost Type of conservation or recycling Type (MCM) (US$/m3) (millions of US$) Reuse of effluent from existing wastewater treatment plant RI 1.0 0.035 0.20 (Coke Ovens) Treatment and reuse of cooling water presently being discharged R2 11.8 0.035 3.00 Treatment and reuse of acidic discharge from pickling plant using R3 2.0 0.048 0.40 neutralization through alkali and settlement Treatment and reuse of waste from cokeovens and blast furnaces R4a 5.0 0.450 3.90 containing high levels of phenol, ammonia, suspended solids, COD, R5a 1.7 through bioxidation, settlement and chlorination; currently, 5 MCM of freshwater have been added for dilution Treatment and reuse of waste from power plant having fly ash and R6 6.2 0.127 3.60 coal particles by adding coagulants and settlement Replacement of cooling ponds by cooling towers C1 12.0 0.135 7.30 Reuse of treated effluent from sewage treatment plant C2 11.6 0.145 10.00 a. Joint use of 5 MCM for dilution water. Source: Metaplanners, 1992. Assuming that the management would like to effluent to be disposed of, treated, recycled, and minimize the total costs of provision and use of saved by cooling process changes. The effluent water, its response would depend upon the from the plant is assigned an effluent charge and following information: this is added to the total cost of water use seen by * The cost of conservation of water through the plant managers. The five process choices and process changes so that both water intake and the two cooling choices have been added together effluent discharged are reduced. to give the six technological options shown in * The cost of effluent treatment so that treated Table 10. water is recycled to reduce water intake and effluent Figures 4.1 through 4.7 give sketches of the' discharged. water use, recycling, and wastewater treatment * The effect of subsidies/soft loans on the options faced by TISCO's managers. In these investment and operating costs of treatment plants. figures, TI represents the combination of the From the available data there are five stages to options RI and R2 shown in Table 8; T2 represents meet water demands for the process side of the the option R3; T3 represents the combination of industry by reducing leakage and waste and by options R4 and R5; T4 represents the option R6; Cl recycling treated effluent. On the cooling side of represents the option C1; and finally C2 represents the plant, there are two stages possible (see Table the options C2. This simplified process analysis was 9). The simulation model keeps track of the used as the basis of a simulation model which de- amounts of water to be purchased, the amounts of termines the minimum cost operation of the plant Table 9: Technological options to reduce water purchased and effluent discharged Water Total Total Total Additional Total Additional Total con- Total purchased recycled losses outflow treatment treatment conservation servation discharge Stage (MCM) (MCM) (MCM) (MCM) (MCM) (MCM) (MCM) (MCM) (MCM) Process side Current 19.00 0.00 0.40 18.60 0.00 0.00 0.00 0.00 18.60 Stage RI 18.03 1.00 0.43 18.60 1.00 1.00 0.00 0.00 17.60 Stage R3 16.08 3.00 0.48 18.60 2.00 3.00 0.00 0.00 15.60 Stage R4 11.20 5.00 0.60 18.60 5.00 8.00 0.00 0.00 10.60 Stage R5 9.59 9.65 0.64 18.60 1.65 9.65 0.00 0.00 8.95 Stage R6 3.52 15.88 0.80 18.60 6.23 15.88 0.00 0.00 2.72 Cooling side Current 30.80 0.00 19.00 11.80 0.00 0.00 0.00 0.00 11.80 Stage R2 19.60 11.80 19.60 11.80 11.80 11.80 0.00 0.00 0.00 Stage Cl 7.60 0.00 7.60 11.80 0.00 11.80 12.00 12.00 0.00  Water conservation and pollution control in Indian industries 15 Figure 4: Conservation and recycling options Figure 4.1: Current situation Figure 4.2: Option I (Stage Rl + R2) 0.40 19.00 0.40 0.03 19.60 18.60 17.60 1.00~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~. 49.80 17.60 30.40 PURCHASE: 1 1 EFFLUENT _ ~~~~~11.80| 30.80 31.40 PLANTr OUNDARY - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Figure 4.3: Option 11 (Stage Rl + R2 + R3) Figure 4.4: Option 111 (Stage R1 + R2 + R3 + R4 + R5) 0.40 0.03 0.05 19.60 0.40 0.03 0.05 0.16 19.60 ases~~~~~~~~~~~~~~~~~ 5. 1.0o 8.93as 35.68 ~~~~~~~~9.08 ~~~ ~15.60 29.19 19.24 89 '~~~~~~~~~~~~~~~ T c3 IC 0 2.00 1 6.631 tt.80 lll'1t.80 31.40 31.40 - - - - - - - - - - - - -