India - Water resources management sector review : urban water supply and sanitation report (Vol. 1 of 2) : Main report

WORLD BANK Report No. 18321 INDIA - WATER RESOURCES MANAGEMENT SECTOR REVIEW URBAN WATER SUPPLY AND SANITATION REPORT VOLUME I - MAIN REPORT JUNE 26,1998 Rural Development Unit South Asia Region World Bank In Cooperation with: Ministry of Urban Affairs and Employment, Government of India; and UK Department For International Development (DFID)  REFERENCES ........................................................ 84 LIST OF TABLES Table E. 1. Summary Matrix of Recommendations .vii Table 1.1. Proportion of Population by Class of Urban Area .2 Table 1.2. Examples of UWSS Institutional Arrangements .11 Table 1.3. Estimated Resource Flows for UWSS during the Eighth Plan Period 13 Table 1.4. Estimates of Investment Requirements and Resource Flows for UWSS during the Ninth Plan Period .16 Table 1.5. Types of Cost Recovery Measures in the Water and Sewerage Services in India .21 Table 2.1. Strengthening Decentralization to Municipalities .26 Table 2.2. Options for Private Sector Participation .33 Table 5.1. Detailed Matrix of Recommendations .77 LIST OF FIGURES Figure E. 1. Possible UWSS Sector Structure .................................................... iii Figure 1.1. The Vicious Circle .................................................... 10 Figure 2.1. The Virtuous Circle .................................................... 23 Figure 3.1. Possible UWSS Sector Structure ........................................... ......... 37 Figure 4.1. Evolving appropriate financial systems .................................................... 52 LIST OF BOXES Box 1.1. The Impact Of Rationing On The Urban Poor ..............................................5 Box 1.2. Success In Solid Waste Management: The Case Of Surat .............. .............8 Box 1.3. Enhanced Market Borrowing By Urban Sector DFIs: HUDCO .................. 14 Box 2.1. Alternative Approaches To Seeking Efficiency - The Traditional Parastatal Model vs. The State Owned Enterprises (SOE) Model .............. 29 Box 2.2. Chennai Service Contracts .................................................... 30 Box 2.3. Contracting Out In Rajkot ................. ................................... 30 Box 2.4. Lease Contracts - The Case Of Guinea, West Africa ................... ............... 31 Box 2.5. Swabhiman Movement, Bangalore ..................................................... 34 Box 3.1. Structure Of The Water Sector In Ostrava, Czech Republic ............ ........... 37 Box 3.2. Community-Based Sanitation In Low Income Areas: The Orangi Pilot Project, Pakistan .................................................... 44 Box 3.3. Serving The Disadvantaged In Ahmedabad And Brazil .............................. 45 Box 3.4. Private Participation And The Poor: International Experience .......... ........ 46 Box 3.5. "Report Cards" .................................................... 48 Box 4.1. Community Responsibility For Cost Recovery: Laastehoop, South Africa .................................................... 53 Box 4.2. A Specialist Urban FI To Support Institutional Reform:  Box 4.2. A Specialist Urban FI To Support Institutional Reform: Tamil Nadu Urban Development Fund ....................................................... 57 Box 4.3. Credit Rating Of Municipal Bonds In India ...................................... .......... 59 Box 4.4. Using A Financial Intermediary To Catalyze Institutional Reforms- FINDETER, Columbia ................... ...................................... 61 Box 4.5. Project Development For Direct Market Borrowing: ................. ................. 64 VOLUME II -- ANNEXES Annex 1. Int'l Experience In Decentralization And Private Sector Participation ... 1 1. Overview of International Experience ........................................................ 1 2. South Africa - Case Study in Decentralization .................................................. 19 3. Brazil - Case Study in Decentralization ........................................................ 22 4. Puerto Rico - Case Study in Private Sector Participation ................ ................. 23 5. Trinidad and Tobago - Case Study in Private Sector Participation ................... 27 6. Guinea - Case Study in Private Sector Participation ......................................... 30 7. Ostrava (Czech Republic) - Case Study in Private Sector Participation ......... .. 40 8. Buenos Aires (Argentina) - Case Study in Private Sector Participation ......... .. 53 9. Manila (Philippines) - Case Study in Private Sector Participation .......... ......... 59 Annex 2. Indian Experience In Community Participation ......................................... 63 Annex 3. Municipal Bonds Experience From The USA . ........................................... 71 Annex 4. UWSS Workshop 11 & 12 April 1997, New Delhi, India ....... .................. 77 Annex 5. Report from the World Bank/GOI National UWSS Workshop June 9 & 10, 1997 ........................................................ 86 Annex 6. Supplementary Indian UWSS Statistics ..................................................... 95 Annex 7. Selective List of Persons Met ........................ ................................ 101  ACKNOWLEDGMENTS The report has been prepared by a team of consultants comprising Dr. Robin Turrell' (Consultant Team Leader), Dr. Jaap Louwe Kooijmans,2 P T Gurnani,3 David Ehrhardt,4 Peter Greif,4 William Derbyshire,4 Astrid Lange,4 Dr. Meera Mehta,5 V Satyanarayana,5 Kirtee Shah,6 and by Christina Wood and Keith Oblitas (World Bank task managers). The work has been undertaken as a joint effort by the Government of India, World Bank and the UK Department For International Development (DFID). Funding of the consultants was through DFID, the Netherlands Government and the World Bank. The team wish to acknowledge the contribution of the many Indian professionals, governnent officials and sector personnel who provided valuable insights and background information on the problems and opportunities available to the UWSS sector - either through discussions or through the large number of papers reviewed. A list of those consulted are shown in Annex 7. In addition to this record of findings and recommendations, the team benefited greatly from personal observation of a number of UWSS organizations at work. Considerable time was spent on field visits, interviews and discussions. These were supplemented by participation in three workshops on UWSS-related issues. Preliminary report analysis and recommendations were discussed at a National Workshop held in June 1997, which was chaired by the Ministry of Urban Affairs and Employment. The workshop was attended by municipal, state and central government representatives, the World Bank, DFID (UK) and other external agencies. The workshop provided particularly valuable guidance for the report finalization phase (workshop proceedings are at Annex 5). The team undertook extensive discussions with UWSS and other administrators as well as customers, to obtain their assessment and view points of UWSS sector realities. These realities have been integrated into the report, which reflects the collective contributions of UWSS stakeholders. Valuable review comments and assistance were received from Messrs./Mmes.: J. Briscoe, T. Nguyen, S. Sarkar, C. Couzens, M. Whitbread, P. Brook Cowen, H. Gain, A. Locussol, J. Chassard-Manibog, I. Fraile, S. Barghouti (World Bank); A. Wray, I. Curtis, C. Athayde, and T. Barton (DFID-UK). The WRM review has been managed by K. Oblitas and C. Wood. Report finalization was undertaken by C. Wood and K. Oblitas, with the assistance of K. Eisenstadt. I Professor, Portsmouth Universiy, UK; Consultant -World Bank/Montgomery Watson. 2 Independent Consultant, The Netherlands. 3 Wenco Consulting (P) Ltd. Delhi, India. 4 London Economics, London, UK 5 Independent /INDO-US: Financial Institutions Reform and Expansion Project, Delhi. India. 6 K S A Design Planning Services (P) Ltd., Hyderabad, India.  The World Bank 1818 H Set N.W. (202) 477-1234 ITERNATIOAL BANK FOR RECOWTRUCTION AND DEVELOPMENT Washdn, D.C. 20433 Cable Adde: INTUAFRAD INTrERNATNAL DEVELOPMENT ASSOCIATION U.SA Cable Adre: INDEVAS / PREFACE India Water Resources Management Sector Work Urban Water Supply and Sanitation Report As India progresses in implementing the ongoing economnic liberalization program aimed at increasing growth and reducing poverty, critical bottlenecks will likely arise that will have to be addressed. One bottleneck that could hinder the success of the economic program, could be a slow response of the-urban water supply and sanitation (UWSS) sector in meeting the increasing demands from greater urbanization and industrial activity. The UWSS to date has performed somewhat below potential in terms of quantity, quality and reliability of service delivery, particularly when measured against best practice. Both institutional and financial factors constrain the sector within a vicious cycle of inadequate resources for operations and maintenance, inadequate water delivery services, and customer dissatisfaction, which ultimately leads to an unwillingness of customers to pay for the services they receive and thus compromises the financial viability of the UWSS agencies. These constraints are recognized in India, and it is encouraging that the government now acknowledges the need for a strategy and action plan to raise the UWSS sector to a higher level of effectiveness. This report, prepared collaboratively with the Government of India and the UJK Department for International Development (DFID), does an excellent job of articulating a sector strategy and action plan for the UWSS sector. Issues directly relevant to India's national economic objectives are raised. These include public finance reform and a heavy focus on the institutional and financial framework underpinning sector operations, with a view to identiting the appropriate incentive structure required to transform the vicious cycle into a virtuous circle of strong performance and financial viability. The strategy and action plan articulated in the report includes various options, reflecting the diversity of urban centers and agglomerations in India as well as the variety of possibilities for organizing and delivering UWSS services to the various urban units. It is hoped that the report serves to inform central, state and municipal governments and forms the basis for sector policy dialogue and reform in India. Frannie Humplick Infrastructure Sector Manager South Asia Region RCA 24s423. GO Wu 64145 g FAX (202) 477-6391  50_- 5 L~= Govemment of India Ministry of Urban Affairs and Employment Department of Urban Employment and Poveny Alleviation vt Fr-1ioO1l, mft1 199 Dated, New Delhi - 1 100 llj 1, 1 199 PREFACE Urban India is in the midst of transformation. In an era of economic reform, liberalization and globalization, cities and towns are fast emerging as centres of growth. In fact, estimates reveal that Urban India contributes more than 50 per cent of the country's Gross Domestic Product at present, although it accounts for less than one-third of its population. It is estimated that by 2025, more than 50 per cent of the country's population wil live In cities and towns. These figures are indicative of the likely demand for infrastructural facilities that could arise due to urbanization. This poses a serious challenge to urban planners, policy makers and managers. This report Is a valuable document in this context The report has elaborately dealt with various important Issues, such as institutional reforms, evolving an appropriate fimancing system, water resources management, private sector participation and has come out with useful suggestions to evolve a suitable strategy for sector sustalnabilty. This report will serve as an usefhal guide to poUcy & decision makers, managers and those Involved in Implementation, operation & maintenance of water supply and sanitation systems. The Ministry of Urban Affairs & Employment acknowledges the efforts of the World Bank team In bringing out such a report, which may help in focusing attention on Issues and reforms required in the sector, to make the services efficlent and reliable. (J.P. Murty) Joint Secretary to the Govt. of India  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report EXECUTIVE SUMMARY i. The Government of India's economic policies are aimed at increasing economic growth, improving market efficiency and competitiveness, and integrating the Indian economy with global markets. The changes required to achieve these objectives will have great implications for urban centers where much of the population and industrial growth is expected to occur. The demands on the Urban Water Supply and Sanitation (UWSS) sector, which serves both urban domestic and industrial needs, will be tremendous. To date, the UWSS has under-performed against expectations. Quantities of water delivered are inadequate and service is unreliable, requiring consumers to make alternate arrangements which are more costly in terms of time and money, particularly for women and the poor. Low quality of service is endemic, resulting in deleterious impacts on consumers, especially the poor, as well as on the environment. The UWSS sector needs urgent attention both to meet the new demands and to ensure that all city- dwellers have access to basic services at reasonable costs. Current situation ii. India's UWSS sector faces many problems and is currently bound-up by a vicious circle of circumstances. Notably: * many UWSS providers are not financially viable and are unable to maintain services without extensive subsidies; * existing UWSS services fall short of full coverage of the population, and are often of low quality due to insufficient funding of O&M. Sanitation services, in particular, are generally inadequate and access to acceptable UWSS services are extremely limited for those in poor communities; and * environmental degradation-the resource as it is currently used is increasingly insufficient and over-exploited. iii. These problems are well understood in India. The traditional response to them has been to centralize control at the state level, concentrate scarce skills and provide technical (i.e. engineering) assistance to the cities. There is general agreement in India that this traditional response has not worked well. This is because most UWSS managers lack the necessary management skills, autonomy and accountability for their performance. That is, the UWSS providers tend to lack clear objectives for management, lack transparency and accountability to consumers, and have been subject to a history of extensive political involvement at the detailed operational level. iv. In recent years, a fundamental policy change has started to emerge for the sector in India, as in other parts of the world (such as South Africa and Brazil), towards delegation of responsibility and accountability to local levels, balanced against a national/state policy framework. This commencement is a positive change in India with its huge diversity of local priorities and situations. The developing consensus in India for financial reform in the UWSS i  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report sector is even more advanced than that for institutional reform. This decade has seen capital markets develop and expand across most sectors of the Indian economy, and financial reform in the UWSS sector is a logical extension of this trend. v. Several examples of institutional and financial reforms provide insight into what has been possible in some places (both in India and overseas). These reinforce the emerging consensus- that it is the poor incentives in the current systems and arrangements which underlie the paradox that the problems of India's urban water and sewerage sector are well known, but nevertheless persist. The way forward-an incentive-based enabling strategy vi. This report's recommended strategy aims at transforming the current vicious circle into a virtuous circle and focuses on improving the incentives faced by UWSS institutions through appropriate democratic governance, ownership and management structures, and through appropriate financing systems. These improved incentives will permit and encourage operational efficiency and effectiveness which, along with appropriately tariff levels set to reflect full costs, will ensure sound financial viability of the UWSS agencies, enable participation of the private sector, and attract funding for capital investment in the sector. vii. The key elements of the proposed incentive-based approach are: * democratic decentralization - to give municipalities incentives to make choices in the best interests of citizens; * commercialization of UWSS providers, and private sector participation - commercialized managers have incentives to operate systems efficiently; and * market-orientedfinancial systems - these will promote financial viability and efficiency in utilization of resources mobilized on market terms. Institutional reform viii. A key element of the proposed institutional reform focuses on municipalization through implementation of the 74th Constitutional Amendment. Provision of water and sanitation services should become the responsibility of municipal governments. They may, however, discharge this responsibility through a variety of arrangements including through a municipal department, or a municipal enterprise, a contract with the reformed state utility, or a contract with a private provider. In some cases several municipal authorities may wish to pool their operations by entering into joint contracts for UWSS services. ix. Devolution of responsibilities to municipal authorities will also need to be accompanied by mandating key good municipal and utility practices. Examples of good practices include preparation of integrated long-term development plans, inter-municipal cooperation and customer consultation and responsiveness. x. The existing state-owned providers need to be radically reformed. The specific elements of reform will vary from state to state, but will include: unbundling by functions such as bulk ii  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report supply, operations and technical services; removing monopolies to encourage competition; and corporatization of disaggregated entities leading in some cases to privatization. The new water utilities must have full autonomy (organizational, managerial, financial) irrespective of their ownership (whether government or private) so that they can operate effectively like commercial entities. xi. These reforms should be supported by (i) enhancing private sector participation, (ii) developing appropriate comparative competition facilities, and (iii) development of civil society- based associations to improve customer responses and feedback mechanisms. Private sector participation will especially help to enhance efficiency and improve service delivery. The envisioned sector structure is sketched out in Figure E. 1. Figure E.1. Possible UWSS sector structure (d) Guidelines, Regulation, etc.j State , t Government 69 Oversight, (g) Resource _Municipality use consent Bulk water' (a) Customer (e) Bulk service consultation (b) Waterprovision water I contract service, providers contractttac I Water service A X I provider (c) Water service >< contract Consumers Notes: a Customer consultation: The municipality consults with consumers. Customers' priorities guide planning, and the water service provision contract. b. Water provision contract: Where the municipality uses an independent provider, it will enter into a water provision contract governing coverage, tariff setting and service standards. c. Water service contract: Specifies consumers' rights and obligations. d Guidelines, Regulation, etc.: state government will support municipalities. For example, the state may issue high-level guidelines for contents of development plans, contracts and/or public consultation. e. Bulk water contract: Bulk water service providers will provide bulk service under contract to the municipality (or the distribution service provider). The contract will specify price, quantity, reliability, etc. f Oversight powers: state government may supervise bulk water service suppliers to prevent exploitation of monopolies. g. Resource use consent: There will be a resource use consent which will govern the bulk provider's access to the resource (details forthcoming in the India Resource Management Strategy review report (World Bank, 1998)). . .  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Financial reform xii. Tariff rationalization is an essential pre-requisite to financial viability of UWSS agencies, and to increasing financial flows to the sector. The UWSS agencies must have the autonomy and authority to set tariffs to ensure full cost recovery, with flexibility to provide special consideration to the poor. Any subsidies provided to the poor (whether through cross- subsidization or direct government transfer to the utilities) should be explicit, transparent and well-targeted. Tariff increases should be undertaken periodically, and be indexed to inflation. At the same time, improvements in operating efficiency are essential for effectiveness of the utilities, and are the express objective of the institutional reforms outlined above. UWSS providers should not simply be allowed to pass on their inefficiencies to consumers in the form of higher tariffs. xiii. If the sector is to access new finance, project preparation and appraisal skills also need to improve. The institutional reforms to boost municipal capacity, commercialize UWSS providers, and involve the private sector, will assist in this regard. Further efforts are likely to be needed from state governments, and financial intermediaries involved in the sector. Social concerns, related to access for the poor, should be addressed through specific measures tailored to meet their needs. This could include a life-line block (or slab) rate, or community-based credit systems to spread payments (for private connections and other capital investments) over time. xiv. Financial reforms should also include a development of community credit systems, and enable direct borrowing from the capital market for the more advanced entities. Debt-market scrutiny will provide the necessary lever to greater efficiency and transparency of credit programs and borrowing. New forms of financial intermediation should be made available to assist the move towards greater commercialization of UWSS sector borrowing through existing as well as new specialized financial intermediaries. New commercial credit enhancement and insurance facilities should be developed to enable the UWSS entities to create credit histories. The use of limited public resources should be reoriented to achieve better leverage of those resources. xv. The proposed institutional and financial reforms are mutually supporting. An initial implication of financial reform, for example, will be that access to more commercial financial facilities will provide incentives for UWSS entities to improve their performances so as to receive better credit ratings (which, in turn, will reinforce the institutional reform by creating a demand for performance information - both ex post and ex ante). Furthermore, financial reform will create greater incentives to focus on financially viable investments. Implementation xvi. Given the huge range of local requirements and opportunities in India, a "one size fits all" approach to implementing the recommended framework is not appropriate. A three-pronged approach is proposed for the implementation strategy: (i) systemic changes - the changes which are essential to operationalize the incentive-based approach; (ii) innovations through windows of opportunity - these are locally-led, incremental, opportunistic innovations which will occur iv  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report where conditions are suitable; and (iii) demand-led capacity building - technical assistance and training to be orientated to local demand. This is intended to promote nation-wide reform while allowing not only flexibility to respond to local needs, but also offering the possibility of a faster track for more progressive states and municipalities. xvii. Systemic changes. The set of systemic changes which are essential to operationalize the incentive-based approach includes five actions. First, devolution of responsibilities to municipal authorities, with key good practices such as accounting separation, long term plans and consumer consultation being mandated by law. Second, reform of the state utility boards by separating the policy and regulatory functions from operations, disaggregation of operations into functional areas and commercialization of disaggregated entities. Third, rationalization of tariff structures and tariff-setting procedures through legislative changes and a system of incentives and sanctions. Fourth, reform of the financing systems to: create a greater market orientation by enabling direct market access for local authorities and enterprises within a regulatory framework; and create new forms of financial intermediation, supported by a reorientation of public resources to provide greater leverage. Fifth, introduction of a comparative competition facility to enable assessment of utility performance. This will be useful both as a management tool and as an accountability mechanism. xviii. Innovations through windows of opportunity. The second aspect of the implementation is the encouragement of locally-led incremental and opportunistic innovations which will occur within the new framework. Progress will, of course, vary between states and municipalities depending on enthusiasm, capacity and need. The types of innovations likely to occur include the following. There will be operational changes due to greater commercialization of the UWSS entities, which will initially result in a drive to achieve financial viability. This will mean greater interest in investing in those projects which will most quickly improve financial viability through improved operational and technical practices, such as reduction of unaccounted for water, and improved collection performance for water charges. There will also be new ways of providing access for disadvantaged groups. Finally, there will be increasing use of private sector participation. Initially these are most likely to be primarily intended to capture private sector know-how and will be through incentive-based management contracts as well as BOT contracts and concessions in selected, high potential areas. xix. Demand-led capacity building. Thirdly, the reform process unfolds, technical assistance and training will be required to develop local capacity to manage, and contract for, their WSS services. This assistance will respond to explicit local demand which, in turn, will be developed by the opportunities the systemic changes will bring and learning about best practices employed elsewhere. Towards an action plan xx. Table E. 1 outlines the proposed action plan for institutional and financial reform. Given the wide diversity of conditions and readiness across different states in India and even between different cities and regions within a state, it is difficult and inappropriate to generalize the detailed implementation sequencing plan. It is expected that each state will consider its options, v  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report develop a state-wide consensus and then prepare its own action plan. This must be done through a consultative process involving all the important stakeholders. xxi. The strategy requires a reorientation in the role of government from being providers and financiers of services, to being facilitators and enablers. Specifically, the new roles envisaged for the central, state, and municipal governments are as follows. xxii. Central government. The central government's role would be indirect but important. It would facilitate and encourage of state governments to undertake the reforms and evolve appropriate state strategies. Specific aspects of central government's role are: to disseminate examples and expose municipal sector specialists to best practices from India and other countries; to develop and provide standard formats and model legislation; to leverage limited government resources through appropriate mechanisms; and to promote comparative competition. xxiii. State government. The state government's role will be very important in the recommended strategy, one of facilitator and enabler. Systemic changes will be implemented largely through a state UWSS strategy which will involve: legislative amendments for good municipal practices and tariff rationalization; institutional restructuring for state water authorities and financial intermediaries; multi-municipal schemes especially for the smaller municipal authorities which may lack capacity, in parallel with the water resource allocation and management plans in different regions; a plan for the use of public resources to maximize leverage; a plan for a comparative competition facility; and an advocacy and demand-led technical assistance and training plan. In addition, the state governments' will also need to explore and promote innovation in relevant areas as windows of opportunity emerge. xxiv. Municipal governments. The enhanced role of municipal governments would necessitate significant institutional changes at the local level. Specifically, their role will be focused on implementing a number of good municipal practices. These would include professionalization of management, consumer consultation, tariff reforms and long term planning. Over time, they will need to contract out some services or separate specific operations to a commercialized entity. xxv. Non-governmental actors and stakeholders. The nature of the enabling strategy outlined above also suggests an important role for other actors, especially the private sector, various professional associations, civil society associations, NGOs, market oriented development financial institutions (DFIs) and other private FIs, and a market oriented regulatory authority. xxvi. The key to implementation of the proposed strategy through these identified interventions is action to produce visible results for the customers. The result and improvements in service provisions will help to cut through the "vicious circle" of problems with resultant deterioration of sector assets and be a stepping stone to the creation of the "virtuous circle"- thus helping to establish a sustainable UWSS sector for the future. vi  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table E.1. Summary Matrix of Recommendations Core UWSS Reforms Objective: The strategy is to change incentive structures so that organizations and people in the sector will deliver sustained, efficient service improvements to customers. To do this we propose that new rules for the game be set; the new framework allow and encourage local level innovations; and fostering a demand-led response for assistance, which will emerge once players have the motivation to improve performance. * Devolve UWSS responsibilities to municipal autlhorities. Mandate key good practices such as accounting separation, long term plans and consumer consultation * Reform the state UWSS providers: separate policy and regulatory functions from operations; disaggregate operations into functional areas; and commercialize/privatize entities * Rationalize tariff structures and tariff-setting procedures through legislative changes and a system of incentives and sanctions * Reform financing systems to enable direct financial market access for local authorities and enterprises, and new forms of financial intermediation; supported by leveraging local resources. * Create a comparative competition facility to coliect and share performance data of Indian and foreign UWSS agencies/utilities to enable assessment of UWSS agency performance and provide benchmarks for improvement. * Implement local innovations, including: involve the private sector in a variety of ways; develop new approaches to serving and involving disadvantaged groups; reform tariffs; increase efficiency, improve technical and operational practices; and access new sources of finance * Demand led capacity building. Provide technical assistance, in response to municipal and utility requests vii  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table E.1 (cont.). Summary Matrix of Recommendations Implementation Plan A Municipal Reform Agenda Objective: Create legal and institutional structures which will encourage good practices at the municipal level. Allow for incremental opportunistic improvements within a framework which aligns organizational and individual incentives with the public interest A.1 Implement enabling Policies: State water sector reform; model laws and procedures for devolution; and devolve responsibility and financial capability to municipalities.. A.2 Implement democratic decentralization and municipal professionalization: institute integrated municipal development planning; strengthen performance and monitoring functions, A.3 Commercialize UWSS agencies and enable private sector participation: A.4 Institute customer responsiveness in UWSS agencies and strengthen the role of civil society B Appropriate State Level Institutions and Regulation Objective: Create legal and institutional structures which will encourage good practices at the state level. B.1 Restructure and decentralize state-level UWSS agencies B.2 Enable multi-municipal schemes through appropriate institutional structures and procedures B.3 Achieve better service for disadvantaged groups B.4 Introduce regulation and a comparative competition facility C Financial Reforms Objective: Promote financial viability through tariff reforms and efficiency gains. Promote market-oriented financing systems to enhance incentives for efficiency and financial viability as well as increase the capital available to finance viable entities in the sector. C.1 Implement tariff reforms C.2 Develop direct market access for finance C.3 Develop sustainable credit enhancement and insurance opportunities viii  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report 1. SECTOR ISSUES AND ASSESSMENT A. BACKGROUND AND CONTEXT 1.1 The new economic policies of the Government of India are aimed at stepping up economic growth, improving market efficiency and competitiveness, integrating the Indian economy with the global markets and sustaining the drive to alleviate poverty. The changes required will have significant implications for many sections of the economy, especially in the cities, where most of the investment is likely to be made. The increase in human activity that is likely as a result of economic policies, particularly in the industrial sector, will increase the already heavy burden on water and wastewater infrastructure. The lack of adequate availability of infrastructure for supporting high-level utilization and sustained growth has been identified by the government as one of four principal inter-related constraints to accelerated growth of the Indian economy.7 1.2 The absolute size of India's urban population is considerable. In 1996 the estimated national population was about 940 million, of which 26 percent (244 million) live in the cities. To put these figures into context, this is roughly equivalent to the combined total population of Indonesia (193 million) and Thailand (59 million). There are three mega-cities-Mumbai, Delhi and Calcutta-all with populations of at least 10 million in 1996. The urban population growth rate, is significantly higher (3.1 percent) than the overall population growth rate (2 percent) and is projected to grow by a factor of three, to some 658 million by the year 2025.8 Urbanization and urban growth is likely to continue in the mega-cities, but growth is also likely to be relatively high in the smaller cities and towns, notwithstanding their current lower share of total urban population (Table 1.1). This is an important consideration for the development of urban strategies in general and the urban water supply and sanitation (UWSS) sector in particular because, from a technical, administrative and financial standpoint, these cities and towns are much weaker than the larger ones. 1.3 Generally, the Indian political and administrative establishment has had an ambivalent, if not hostile, attitude towards urban areas in general and the mega-cities in particular. This has led to a situation where the political, administrative and financial affairs of most Indian cities are completely inappropriate for the new economic role that they are to assume - with resultant negative impact upon UWSS services. 1.4 In 1992, the Indian Constitution was amended with the intention of redressing the issue - this was the 74th Constitutional Amendment (CA).9 This provides locally elected municipal 7 Approach Paper to the Ninth Five Year Plan, Ch. 2, Para. 2.1. 8 This growth in urban population, of over 400 million people, by itself, is approximately one and a half times the current population of the USA (261 million) and about half the current population of Europe (800 million). 9 Inter alia, the 74th Constitutional Amendment provides that: i) where local govemment is superseded, it shall be reconstituted by local elections within a period of six months; ii) the states shall constitute "finance commissions;" and iii) the states shall constitute 1  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report government with the financial and administrative means to govern effectively; while this has raised a number of delicate issues, at the heart of Indian federalism, the very fact that the CA has been ratified by the state governments indicates that there is widespread understanding of the roots of current urban malaise in India. There is also a growing consensus that political, administrative and financial reforms must be undertaken to enable progress to be made. In this sense the CA is an important and historic break with the past, and opens the way for radical reforms that will improve service delivery in both the urban and UWSS sectors. Table 1.1. Proportion of population by class of urban area * Class of Population Size No. of UA/ Contribution to India's urban City (No. of inhabitants) Towns** population (% in 1991) I (> 1,000,000 inh.) 300 65.2 11 (100,000 - 1,000,000 inh.) 345 11.0 III (50,000 - 100,000 inh.) 947 13.2 IV (20,000 - 50,000 inh.) 1,167 7.8 VNI (5,000 - 20,000 inh.) 937 2.9 Total 3,696 100.00 Notes: *These figures are from the 1991 census for all states excluding Assam. a"The exact classification of population centers is subject to different interpretations of "urban" used in different parts of India. Sources: Govemment of India. Eighth Five year Plan (1992-1997), Volume II - Chapter 13, p. 347. Planning Commission, New Delhi. Selvam, P. and Cuenco, E. K. (1996). India: Urban Infrastructure Services Reviewv, the Environment Perspectives (draft). 1.5 It will, however, take time to fully implement the CA. Elections have been held in all states, except Bihar.10 State Finance Commissions have also been set up in all the states, ten of which have submitted their recommendations to the State Legislature. In the process they have faced the (common) problems related to poor data on state and local finances as a result of the fluid relationship between state and urban local bodies. District Planning Committees have been established in West Bengal, Kerala and Madhya Pradesh."' 1.6 The CA laid the foundation for democratic decentralization by giving municipalities throughout India original constitutional status and powers. The CA did not in itself define the functional responsibilities of municipalities. This was left for the states. Among the matters which states may devolve to municipalities are: water supply for domestic, industrial and commercial purposes; and public health, sanitation and solid waste management. The CA also requires district and metropolitan level planning. Municipalities' actual powers and duties in the metropolitan and district-level "planning committees" for the purpose of preparing and monitoring the implementation of metropolitan and district-level development plans. 10 There are a few municipalities, in selected States, where elections are still to be held. l A review of progress to date suggests, excepting Bihar, no state govemment has legalized all functions listed in the It Schedule as legitimate municipal functions. More importantly, a review of the conformity legislation of some states (Maharashtra, Gujarat, Rajasthan, Haryana, Punjab, Karnataka and Bihar) shows that even where additional functional responsibilities have been entrusted to local bodies, no provision has been made with regard to how the finances will be mobilized to discharge these new responsibilities. (See: Accountability and Decentralization in Urban Govemance. Report from the National Workshop. October, 1994. New Delhi, New Foundation for India.) 2  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report area of water supply and sanitation depend upon laws passed at state level. To date in most states the responsibility for UWSS is vested in the local authorities. However, implementation of these laws will require considerable reforms. Despite examples of achievement, the inadequacies in the urban and UWSS sectors have been major impediments to change. Those relating to UWSS are discussed below. 1.7 There is a growing awareness and acceptance in the govemment of the need for substantial changes in the sector. A number of policy papers, and the work of the State Finance Commissions, captures this emerging consensus, best illustrated by the following extracts from the recently approved "Approach Paper to the Ninth Five Year Plan" (Feb. 97): * "One of the most important influences that has emerged during the Eighth Plan is the inadequate development ofphysical infrastructure. This is partly due to the reliance that was placed on private sector investment that did not materialize in adequate measure. In the Ninth Plan too, public investment in infrastructure will need to be supplemented by private participation. It is necessary that impediments and bureaucratic delays are speedily removed In particular the legal, procedural and regulatory framework has to be suitably revised in order to create a conducive environment for making such investment both possible and viable. * "Efforts will be made to provide access to safe drinking water facilities to the entire population in urban and rural areas during the next five years. * "Consistent with the goal of health for all, efforts will be made to provide a reasonable level of sanitation to the entire urban population [during the Plan period]. * "The responsibility for planning, operation and maintenance of the urban facilities will be passed on, wherever not done, to the local bodies, in line with the 74th Amendment. * "Efforts will be made to develop alternative means offunding and management of urban water supplies and sanitation facilities to reduce the dependence of this sector on budgetary assistance and render these services more efficient. * "Efforts will be made to enhance the financial viability of the sector through policies based on full cost recovery to permit resource mobilization for the sector through institutionalfinance, market borrowings, private investment etc. Subsidies, if required, for the poorer sections of the urban society should be selective, well targeted and transparent to ensure that there may be no excessive cross-subsidization from the other sections. * "In providing services in the urban areas, emphasis will be on cost-effective and eco- friendly technologies that make full use of local skills and materials. The successful experiments and best practices adapted elsewhere in the country will be emulated on a wider scale to suit the social, political and cultural environment and climatic conditions. Environmental, technological and institutional sustainability will be the highest consideration. 3  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report 1.8 Despite the emerging consensus, the urban water supply and sanitation (UWSS) sector continues to under-perform against expectations. Low quality of service delivery is endemic with resultant negative impact upon consumers, especially the poor, as well as the environment. The lack of operating efficiency poses serious impediments to the achievement of the declared macro economic and poverty alleviation goals. If the basic infrastructure is not in place, new industries will not so easily be attracted, and industrial growth will be constrained. It is equally important to expand and improve the access and availability of water and sanitation services to the poor and disadvantaged members of the society. Industrial expansion, the growing awareness of the urban customers and the needs of the poor and disadvantaged, are the likely drivers of demand for UWSS services in the future. To catch up on the backlog resulting from inadequate past performance, and to meet the rapidly growing additional demand, substantial capital investment will be required in addition to increased expenditure on operations, maintenance and rehabilitation of the existing infrastructure. 1.9 The principal issues facing urban and UWSS management in India revolve around professionalization, autonomy and accountability. Failure to address and implement reforms now will greatly inhibit the prospects of India meeting its declared macro economic and poverty alleviation goals. There will be no panacea, and there can be no standard solution. There is a need for a new framework which encourages and rewards innovative solutions to local problems (the shape and form of which, will vary throughout the country) - so as to respond to the specific and focused needs of the local users. The stakes are high. The distribution of political power between the center, states and the municipalities and also between the politicians and bureaucrats is being tested. However, this situation must be brought to a satisfactory conclusion for the common good. B. CURRENT SITUATION AND SECTOR PERFORMANCE'2 1.10 The sector's problems can be summarized by: poor institutional structures, weak organizations and poor governance. An assessment of UWSS in India, however, is made difficult by the very weak information base. Attempts have been made to review as much as possible of the available materials. Service coverage and quality 1.11 According to official statistics, service coverage of water supply, in particular, is quite high. The Approach Paper to the Ninth Plan estimates that 85 percent of India's urban population has access to water supplies and 48 percent to sanitation services. Though details on the quality of services delivered is scanty, and the limited information contains anomalies (see Box 1.1), there are indicators that water quality is often poor,'3 with consequent health impacts. In most urban areas, water supply is intermittent. While many schemes are designed for a 24 12 This section summarizes the current situation. In addition to the material contained in this section, a selection of supplementary Indian UWSS statistics are provided in Annex 6. 3 Selvam (1989) found bacteriological quality standards were not met in 16 of 47 cities studied. 4  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report hour supply using 150/200 liters per capita per day, consumers experience regular shortages, with only a few hours supply on average per day. Many higher income groups have responded to the situation by partially self-supplying. Many have installed ground level sumps, roof level tanks and boreholes to ensure their water supply during the intermittent flows. Disinfection is achieved by boiling. Bottled water, at very high unit costs, is also used. Box 1.1. The impact of rationing on the urban poor '-"Usually most national reports describe the total population of a whole town as 'covered' if there is some kind of water:supply system finctioning in the city. Per capita figures of supply are calculated even more'simplistically by-dividing the total installed capacity by the population. We need to go very far to search for the truth. In. Delhi: itself the per capita water supply, as officially reported, is about.200 liters per day. This comfortable average, however, doesn't mean much to about 30 percent of the city's nine million people who have access, if at all, to about 25 liters or less". "The sanitation cover of the urban population in the country is extremely unsatisfactory. Only about 42-43- percent of the total urban population is reported to have access to basic sanitation. In the low income slum and squatter settlements, the percentage is even less, with only 15 percent of the households having toilets and another 21 percent having access to community toilets. What is important is that 61 percent of the poor households use 4open spaces' for personal sanitation. Apart from being a major source of environmental deterioration and high negative. externalities, it is the root of many human and social problems." Sources. Sivaramakrishna, K. C., B. Dasgupta and M. N. Buch, Urbanization in India, Basic Services and People 's Parickipation, Institute of Social Sciences and Concept Publishing Co., New Delhi, 1993, p. 8, and Mathur, 0. P., The State oflndia's UrbanTovert National Institue of PublicFinance Policy, New Delhi, July 1993, p; 68. 1.12 Low pressures and intermittent supplies allow back-syphonage resulting in contamination of the water in the distribution network. This problem is most evident at cross-over points between water distribution mains and street drains, which are in practice open sewers, and/or where the sewers are at a higher level in the ground. The outbreak of Cholera in 1993, in the slum settlement of Korukkupt, Chennai was caused by this type of problem. The poor quality of materials and equally poor methods of construction used, combined with poor operations and maintenance, has led over the years to the underground assets generally being in very poor condition. This has a direct impact upon system efficiency and the quality of service delivery.'4 The zoning of distribution systems is not generally practiced, with the result that there is no reliable information on physical water losses in the reticulation systems. Where production and flow meters exist they are generally not re-calibrated. 1.13 The metering of domestic customers in any city is rarely taken seriously. Meters that are installed generally do not work for very long (due to high particulate matter in the mains, which block the clock mechanisms, or due to damage caused by surges, when pressure returns to the intermittent water supply, or due to vandalism). Even where they do work, the very low tariff charges are either not collected or are not worth collecting. Disconnecting domestic consumers for failure to pay is extremely unusual, although this sanction is occasionally used with commercial customers. The low priority accorded to collections has a significant impact on the revenue base of water entities. Whilst there is abundant evidence that most domestic consumers, 4 Estimates of average physical water losses in systems range from 25 percent to over 50 percent. Non- physical UFW (or 'administration losses') are also likely to be high. Intemational experience shows that "administrative losses" can be two to three times the "physical losses". 5  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report at virtually all levels in society, are willing and able to pay much higher than official prices for water, only the presence of large commercial and industrial users (who are metered and pay a high tariff rate) keep many of the water utilities in funds. The poor and disadvantaged groups 1.14 The poor'5 and disadvantaged groups lack access to basic urban services generally, but the poor are particularly badly served by public WSS systems. While domestic water and sanitation services are frequently subsidized, most of the subsidy benefits go to the urban non- poor'6. Furthermore, the poor have very little leverage to get things changed and so are forced to endure the current system and make the best of the situation, with resultant implications for their health and well-being. Ironically, the much-quoted subsidies are ineffective and tend to perpetuate the inequitable treatment of the poor and disadvantaged members of society. The very limited services available to this section of society means that they frequently have to find other means of getting water and have high associated monetary and time costs. This results in higher costs per liter of water for the poor as compared to the middle income and wealthy - even more so when related to their disposable income. 1.15 It is estimated that between 40 and 60 percent of the urban poor live in slums or squatter settlements,17 the balance live on pavements, overcrowded tenements or commute daily from peri-urban areas.18 Under these circumstances, it is difficult to establish programs targeted for the urban poor, without having a large amount of 'leakage' to the non-poor. It also underlines the need for a strong linkage between the development of UWSS and urban planning. Excreta disposal and sewerage 1.16 Only 70% of India's urban population has adequate excreta disposal facilities (WHO, 1996). For many of those not served, on-site disposal systems are most affordable and appropriate. It has long been government policy not to build sewerage systems in towns of less than ten million people. More could be done to meet the needs of such groups, particularly the poorest. Marginal groups are particularly affected by inadequate excreta disposal, not only because they are least well served, but also because sweepers, an important marginal group, face the task of cleaning service latrines, which also exposes them to a high risk of infection with excreta-related pathogens. 1.17 There is widespread ignorance among officials in the sector of the existing levels of access to excreta disposal facilities. For example, in Lucknow, where the very existence of 15 Estimates of urban poverty levels in India show that as much as 30 percent of the total uban population lies below the poverty line. One problem with these measures is that they are based on expenditures for consumption, which exclude income in kind and subsidies - both of which can be large components of an individual's income. Railway workers, for example, receive about half their income in kind, in the form of housing, electricity, health care, education and food. 16 See 'In the Name of the Urban Poor - Access to Basic Amenities.' Amitabh Kundu, Sage Publications, New Delhi, 1993. 17 Surveys of slum households indicate that mean earnings were between 9 and 16 percent above the poverty line. Between 40 and 50 percent of households in slum and squatter settlements are below the poverty line and about 11 percent have incomes just above the poverty line (World Bank, 1997). is India - Urban Infrastructure Services Review, May 1997. World Bank. p. 5. 6  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report service latrines was denied by sanitation and health staff alike, a later survey found that they were used by a quarter of the population. There are also many households which could be better served by existing sewerage systems which are currently blocked or otherwise failing to function adequately. This includes both households which are connected to such systems and those which currently see little advantage in being so. 1.18 It has become the norm in programs for the promotion of low-cost sanitation that latrines are heavily subsidized. On the one hand, this has tied the productivity of such programs to the subsidy budget available; on the other, it has constrained the demand for low-cost sanitation solutions which are paid for at full cost. Households are reluctant to invest the full cost of a latrine if they stand a chance of benefiting from a 90% subsidy. 1.19 Due to inadequate sewerage and lack of wastewater treatment facilities, river water and other sources for drinking water supply are excessively polluted, putting further demands on water treatment processes and contributing to the increase of water-borne diseases (refer also paragraphs 1.22 and 1.23). The treatment of sewerage, while limited to the large cities, is fortunately improving. Within the scope of river action plans, such as the Ganga and Yamuna Action Plans it is proposed that small towns will be provided with sewerage treatment. Innovative technologies,19 such as aquaculture, pisciculture and afforestation, are being utilized in various parts of the country.20 These projects also aim to standardize land utilization, loading rates and maximize resource recovery. Storm water drainage and solid waste management 1.20 Urban storm water drainage and solid waste handling form part of an integrated water resource management approach. Much of the uncollected solid waste in cities, ranging from approximately 8 percent in Calcutta to 75 percent in Patna, ends up in the drains and sewerage system. This causes severe blockages which require frequent clearing to prevent flooding at the time of monsoon rains.21 1.21 A further problem which results from the combined shortcomings of solid waste disposal and surface water drainage is the proliferation of nuisance mosquitoes,22 which breed in blocked drains, cess pits and other bodies of waste water. In order to prevent the nuisance of nocturnal 19 In Haryana, ten modem process treatment plants (OECF-financing) are under design/construction with a total capacity of 295 Mld. In Delhi, 15 new sewage treatment plants, with a total capacity of 990 Mld. are under construction and five plants in U.P. are to be set up soon. Additionally, two sewage treatment plants will be constructed for the Hyderabad Metropolitan Water Supply and Sewerage Board and proposals for construction of a 200 Mid. plant for Kanpur and a 160 Mld. plant for Ludhiana are underway. In Tiruppur, the proposed BOT wilt also make provision for a modem sewage treatment plant. 20 There is no intrinsic contradiction between wastewater re-use and public health.' Mara & Caimcross (1989). 21 For example, in a recent survey of Lucknow, 3.2% of the of households reported flooding which entered inside their houses, and 3.5% reported that their homes had suffered flood damage. In addition, 7% had taken preventive measures to protect their properties against floods, such as raising the floor level or building a boundary wall (MSG 1997). 22 In some Indian cities, these mosquitoes also transmit bancroftian filariasis, causing elephantiasis. In the town of Pondicherry, for example, the prevalence of filariasis is several times what it is in the surrounding countryside, and nearly half the mosquito breeding in the town occurs in the drains. Caimcross, et. al. (1988). 7  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report biting, poor families spend substantial amounts on mosquito coils. For example, this accounts for 3 to 5% of the total expenditure of an average household in one Delhi basti.23 1.22 These linkages are another reason for a reforming municipality to tackle the problem of solid waste, as one of its first actions, and as part of an overall effort to improve public health in the cities. The low status accorded to both solid waste management and storm drainage as a public health intervention, ensures that they o 1.2. c i si ws i;Te * , . 1 . . , . B~~~~~~~~~~~~QX4 4SE2.EL Succes mEs W 1 vate tmnget E:ETht, . eB . .... receive little engineering, planning or - SO was epanag e case: Of Sitrat budgetary attention. The potential impact of drainage and solid wastes handling thus -The outbreak of paue-lie disease in Surat, m 1994, needs to be assessed, when examining brou solid waste etoohe public's attention. The corast UWSS needs. While there are no figures between the scrupulously cleanindian homnes adthe jheaps tou ,unambiguously, the linkage of rubbish andfilthcommonly found in he urbanpublic to support, unamDlguously, the lmKage fspaces, was imuchdiscussed in the newspaperspofithe6davyl. between solid waste management services Urba flth was deemedtobe bad for bothpic health and public health, the outbreaks of serious :and for thelurban economy, where the disease :vwaslpresent. l: epidemics, as in Surat, gave a temporary i i Accordgly,the situation createdi ani ntense ipoliticA impetus to providing the service effectively will to clean up the ty. Mony aSdIprofessional mangemrent wasibmobilized'bon a: PS/P asis andthere... and efficiently (see Box 1.2). wasamajorclean ngof the urban areas. Tody, Surat is oneof the: cleanest cities: in India, inicating how rapidly River pollution and overall water and effectively this can' beachievedif political will and the resource management organization are present The onty question yt lto be:,' answered, is that: of sustainabilit This concern underlfines 1.23 The rivers are the lifeline to many thelneedfor fsystemric changes to9 establish incentives for...., cities and towns along their banks. Almosti the entire country is crisscrossed by rivers profit has dissipated. with a total length of some 45,000 kms. The country has 12 major, 46 medium and 55 minor river basins. Half a century ago, most of the rivers in India were biologically in good condition, amply met the water needs of their basin populations and supported diverse fish and flora species. Over the decades with the rapid growth in population, industrialization and indiscriminate exploitation of the nation's rivers, they are now grossly polluted.25 Due to pollution by partially-treated and untreated sewage, and inefficient solid waste disposal, there are a number of negative environmental impacts. To compound the problems from the UWSS perspective, some rivers also dry-out during the summer months with resultant impacts upon both the supply of drinking water and disposal of effluents. 1.24 Water allocation. At present there are no legal or administrative frameworks which allow for the re-allocation of water from low-value agricultural use to high-value urban and industrial use. A coherent water allocation strategy is important for the UWSS sector. As urban water demand increases, the pressure on the availability of adequate and safe water resources 23 Hukoo, et. al.. (1994). 24 Inadequate solid waste management leads to the clogging of drainage channels and sewers resulting in stagnant conditions - with a resultant impact upon the environment and human health. 25 The Central Pollution Control Board have conducted anumber of river basin studies. Using best use primary water quality criteria, they revealed 19 grossly polluted stretches and 14 less polluted stretches along 19 rivers. The major sources of pollution have been identified as industrial and domestic wastes and non-point sources. 8  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report also increases. While the Government of India's National Water Policy states that domestic drinking water has the highest priority in terms of water allocation, in practice this is followed only haphazardly in the states, where there is no integrated approach to the allocation of water resources between competing uses. The interests of irrigation still dominate and this drives up the cost of bulk water to the cities. The issues in developing a water allocation strategy are discussed in the WRM's Intersectoral Water Allocation, Planning and Management Review,26 undertaken in parallel to this review of the UWSS sector. C. INSTITUTIONAL ARRANGEMENTS 1.25 The wide variety of institutions in states across India has, in the great majority of cases, failed to evolve institutional arrangements which promote consumer responsiveness, operational efficiency and an enabling climate for improvement and investment. These shortfalls, in addition to financial management constraints (refer to paragraphs 1.34 to 1.58), contribute to the poor sector performance described above, and keep the sector operating in a "vicious circle" (Figure 1.1), incapable of overcoming the deficiencies without significant reforms. Institutional deficiencies 1.26 It needs to be borne in mind that this section, by its nature, focuses on the problems in the sector. The sector does function and it provides UWSS services to many millions of Indians. The sector has responded to new challenges and there are many examples of local initiative, some of which are discussed in this report. The sector's overall performance, however, is severely below the needs, and many of the shortfalls can be traced in origin to institutional arrangements. Despite the lack of current formal analysis of the sector, there is near-consensus among the different actors regarding the institutional problems in the Indian UWSS sector. Significant gains are possible if key features of the sector can be fundamentally reformed. The problems can be summarized as deficiencies in: (i) management autonomy and accountability; (ii) consumer orientation; (iii) management structures and continuity; (iv) organizational resource management; and (v) accounting and financial management. Each of these deficiencies is assessed in turn below. 26 Water Resources Management Sector Review: Intersectoral Water Allocation, Planning and Management. The World Bank/Govemment of India. Draft 1997. See also WRM's Sector Review: Irrigation Report & Groundwater Report. The World Bank/Govemment of India. Draft 1997. See also Matrix from Intersectoral Report. The World Bank/Government of India. 9  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Figure 1.1. The vicious circle | NoCustomer P Focus lli Revene ll These are simplIstically, tw\ c/ncentric IinlesInappropriatena I I P~~oor i4 ; Cpb I ~~~Service Iv ac Ina te UW stss Sector nr t -indiret lin A \ t I~~~~~~~~~~~~nadequate 1.2 M stUPot atnomstebtare r f loc or t g eocus a H v Inappropriate _ _ | / \ ~~~~~~~~~~~~~~~Policies _(Macro/Micro) Thmse ari simraistiolly, no wncentric a iciods t Inappropriate circms. gBreakingpathie euve o en trae m Govemance o Management a unduly uolsiticeally omina th.U edtr . Teefcoscmiet erv W Smngr ftedge otecome sepf sustaininc. a s direct link . . . -..- -- - indirect link 1.28 Most UWSS providers are not autonomous but are part of local or state government, e^ither Municipal Authority or as a PHED. Even in those state-level organizations and cetropolitan organizations which are intended to be semi-autonomous in day-to-day mnanagement, in practice even the most detailed operational decisions are governed by an extensive network of rules and regulations. In addition, managers' decisions often appear to be unduly politically dominated. 27 These factors combine to deprive UWSS managers of the degree of operational independence that is essential in running a city's WSS system. Managers are not accountable for their organization's performnance to the extent their private sector counterparts are. At times the lack of autonomy results in unnecessarily risk-averse, rule-bound behavior by many managers, while the lack of accountability results in behavior which at times appears driven by concerns other than those of their enterprise. 27 This political influence is visible also in the tariff levels and structures evident in many parts of India. Seldom do tariffs fully cover operating and maintenance costs, let alone provide for capital costs or forecast expansion. Consequently, many UWSS providers are not financially sound. 10  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table 1.2. Examples of UWSS institutional arrangements Type of agency Jurisdiction Responsibilities Examples Operations& Capital works maintenance State-level specialist Entire state State-level specialist agency (SAS) Kerala Water Authority agency (SAS) ................................................... ......... ............................. .................................................. ...... .................. Small cities Municipal SAS Karataka Authority Maharashtra Tamil Nadu Uttar Pradesh ................... ....... ................................... Small cities State-level specialist agency (SAS) Kamataka (some cities) * Large cities City level SAS Uttar Pradesh specialist (e.g., Lucknow, Varanasi agency Jal, Sansthan) .......................................................................................... ................................... .......................................... ........................................................ Metropolitan-level Metropolitan Specialist Metropolitan Agency Bangalore, Chennai, Specialist agency I centers Hyderabad ................................................... ...........................................I.......................................................... Specialist municipal Metropolitan Specialist Municipal Undertaking Delhi undertaking centers Pubic Health Entire state Public Health Engineering Rajasthan Engineering Engineering * ~~~Department (PHED) Departments (PHED) .............................................................................................................................. ........................................... ...................................................... Small cities Municipal PHED Andhra Pradesh Authority .......................... ............................... ................................... .............................. ...................................... Municipal Corporations Municipal Large * Municipal Department icipal Corprations in Gujarat, Maharashtra, Departments Municipal Tamil Nadu, Andhra Corporations * Pradesh 1.29 Consumer orientation. The general lack of consumer orientation is reflected in a lack of consumer consultation undertaken by UWSS providers about significant issues such as quality/tariff trade-offs. A contributing factor is that most UWSS providers rely on subsidies from the national and state governments to meet their financial obligations, in some cases to a greater extent than on revenue from customers. UWSS managers often perceive revenue from customers to be "fixed" whereas subsidies need to be "managed". Consequently, many managers pay more attention to maximizing subsidy revenue than to their customers' concerns. That said, there are many examples of good practice. For example, consumers in Mumbai and Hyderabad have, at times, been able to participate in the planning and implementation planning process through user groups. Another example is the "Swabhiman Movement" in Bangalore, a consumer initiative which promotes the organization of resident groups to address neighborhood problems and provides a platform for information exchange and discussions with civic authorities and NGOs (see Annex 2). 1.30 Management structures and continuity. Promotion to senior management posts tends to be on the basis of seniority, rather than on merit. In consequence, there are frequent changes in top management positions (in some states, average incumbency is around six months). This in turn prevents the development of specific skills and a longer-term outlook in senior managers. 11  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report The seniority system also means that many senior managers in the UWSS do not have the required knowledge or skills to effectively manage their large, complex and often financially- troubled organizations. In the case of PHEDs and WSSBs, the challenge senior managers face is often intensified because the top appointed officers who manage these entities come from sectors other than WSS. 1.31 Organizational resource management. Poor procurement of materials, poor construction practices and inadequate maintenance has reduced the operating efficiencies of water systems. They deliver an average of less than 50 to 60 percent of their capacity to the end-users, compared with best practice delivery rates of around 80 to 85 percent in other countries. Poor and in some cases non-existent management leads to waste and inefficiency, with the resultant large claim on resources that could be re-deployed for service improvements. The lack of human resources development and personnel policies tailored to meet organizational needs has led to both widespread overstaffing and labor misallocation. Overstaffing is endemic, the ratio of staff per 1,000 service connections, an accepted measure of efficiency of water utilities, ranges from 40 to 60 staff per 1,000 connections in India.28 1.32 The absence of information systems to enable informed management decisions is common. A sine qua non for the serious planning and management of water supply and sewerage systems is accurate topographical maps of the urban areas under consideration. Accurate and up to date maps and plans are noticeable by their absence, even in the larger conurbations. Investment in accurate maps and system plans is a cost-effective initiative that could be made early by any municipality with reforms in mind. The absence of long-term focus, prevalent among managers, fosters a lack of long-term corporate planning, and a lack of capacity to undertake such planning. Basic information (for example, up-to-date municipal maps and asset plans) and information systems for engineering and accounting functions are often under- developed. 1.33 Accounting andfinancial management. The above problems, particularly the lack of institutional and managerial autonomy and accountability, are also evident in the lack of accounting and financial management tools used in the sector. Few entities report against a set of monitoring indicators, let alone publicly forecast those indicators and report against them. Full audited cash accounts are rare, full accrual accounting appears to be almost non-existent. Consequently, comparatively little financial management information is available to run, or to scrutinize the performance of, the UWSS organizations. As these problems are increasingly understood in the UWSS sector, it is not surprising that there have been some positive developments in recent years. Notable examples include: the separation of UWSS budgets from the general budgets in one Municipal Corporation in Maharashtra and, in some cases, in Tamil Nadu; the legislative requirement for an annual report on subsidies in Maharashtra; and the introduction of a commercial accounting system in the Chennai Municipal Corporation. These, and many more examples throughout India, are nevertheless overshadowed by situations where change is minimal. 28 The regional average is around 10 staff per 1,000 connections; intemational best practice is around 2 - 3 staff per 1,000 connections. 12  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report D. FINANCING URBAN WATER AND SEWERAGE Financing arrangements 1.34 Traditionally, urban environmental infrastructure such as water and sewerage, have been considered as public services to be provided by the local governments and related parastatal agencies. Municipal authorities have largely depended on grants and loans through the budgetary allocations of state and central governments, and to a limited extent on surplus from their own budgets., Table 1.3 highlights that over two-thirds of the financial resources for UWSS have come from budgetary allocations during the Eighth Plan period. In earlier years, almost the entire financing was through this mode as institutional finance for these investments is very recent, limited in volume and has been largely through government owned development finance institutions (DFIs). The local entities, who are the actual service providers, have mostly lacked direct access to the market. Table 1.3. Estimated resource flows for UWSS during the Eighth Plan period (Current Rs. billion) VNIUA (1997) EGCIP (1997) MOUAE (1996) ............................................................;........................................... .............................................. ................................................................. Plan Funds 55.9 (80.0) I 57.6 (62.4) 59.8 (73.2) ~~~~~~~~....................................... ..................................... ........................ ................... .I........... Institutional . 13.9 (20.0) 34.7 (37.6) 21.9 (26.8) (estimated) ..... ................................................................................................................................................................................................................. Total 69.9 92.3 81.7 ......................................................... i~ Average annual flows 139 18.5 16.3 Note: Figures in parenthesis indicate the percentage share in total Sources: NIUA (1997), EGCIP (1997), and MOUAE (1996). 1.35 A review of the financing arrangements for the urban sector has to be done within the overall context of financing arrangements in India. Until recently, these have been characterized by the directed credit regime in which different financial institutions are mandated to invest in specific priority sectors. For example, the nationalized Life Insurance Corporation of India has been required to invest 25 percent of its annual accretion to controlled funds in the social sectors, including water and sanitation. In addition, the high statutory liquidity ratio requirements for the banking sector also made funds available for priority purposes. The DFIs have largely benefited from this regime, though with the financial sector reforms this system is now undergoing considerable change. Resource mobilization by DFIs is being increasingly undertaken through market borrowing without government guarantees. In the urban sector, however, this has been true to a limited extent only for the Housing and Urban Development Corporation (HUDCO) (see Box 1.3). The limited number of intermediaries at the state level have largely depended on state transfers or Plan allocations and borrowing from HUDCO for their resources. 13  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Box' 13. 'h'ned tmke bo'rr wi by urban s'o 'FI HUDCO; Hlousing~and:U tirban Deeof ent- Coprtitn (HD tre operationsintheerysvnisf$n largely on financing housing. Since 1990, HUDGO has also started financial operations in the urban~~~~~~~~~~~~~h S 199, HDCO:hasI d Al ' i osgg n cm Qm iEniwi9 "g a :ai 8 stat nanci foper io i:i i ie-u an. infastuctresector.:- It financesja} variety;^ f uran jinfrastrucue jwith Xa major $focus 0onj UWSS. ByJune.;$ 197, kit had disbrsed over Rs. 19 billon H in urban infast re of which%R; 7.4 billion was for UWSSJin over.270 dinshes. Although intial years hHUC eefted from the dired credit rgime. 6overh: ;past few years H O: h as mobilized lanincreasing -:shareof is additi onal reSoues from the market wihout any xplicit Gvernmentofndia:i backig HUC a n f the firs finaci= intermtediaries in the ountry toi m e debtithrough infrastructurebonds With the ephasis n market -borroig,- HCOt hasi also ibegu to introduce more innovative ihrepayment s:tctures withescrow -accountst- if or j- prvate: 00sector lending.tt0000 HUDGO has 0-also (ibeen minfluentialin: itntroductionofbetter. cost recovery m feasures fr the water'sector and has worked withisevea state0governments iniths regard. Seurce: HUDC: UrbanInfrastructure:WingN, ew Delhi- 1.36 The major funding, therefore, has come from the Plan allocations through the central and state schemes. Some of the state governments provide loans and grants to local bodies for water supply through the Plan allocations. For example, in the state of Maharashtra grants are available to local bodies ranging from 23 to 100 percent depending on the size class of municipality. In most other states, loans are available through Plan allocations. In general, however, the available funds through Plan sources are far less than those required for provision of basic services. The allocation of these funds to different municipal authorities is generally driven by political considerations and does not follow any rigorous project preparation and appraisal process. 1.37 These financing arrangements have resulted in a lack of rigor in lending in this sector. At the borrower's end this has led to a situation of inappropriate incentives and the resultant inefficient utilization of funds, and widespread service inefficiencies. There is also a lack of project development and management capacity at the local level. It is common for inter- governmental loans not to be serviced properly. Such delinquency is often adjusted against the transfers from state to local governments or through rescheduling of state loans. This has, in general, led to a lack of transparency, promoted apathy on the part of local authorities to financial viability issues, and inadequate attention to effective tariff structures and cost recovery. 1.38 Another problem in financing of water supply projects, especially for the smaller and weaker municipalities, has been their inability to generate their own contribution to project resources - as many do not have operating revenue surpluses. This situation may improve if the recommendations of many of the state finance commissions are implemented - both for rationalization of devolution of resources to local bodies and for improving their finances through a variety of measures including introduction of user charges on a full cost recovery basis along with indexation. For example, the Punjab State Finance Commission has recommended these changes as well as introduced incentive based devolution of grants to induce better fiscal performance for urban local bodies. 1.39 Another feature of financing arrangements for water and sanitation has been a lack of control over investment decisions by municipal entities, even though they are saddled with both the resultant debt servicing and operation and maintenance of facilities. This has especially been 14  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report true for the smaller municipal entities where the investment decisions have often been made by state level utility boards. Financing gaps 1.40 Within the above system, the flow of resources for urban infrastructure has been far too small relative to the needs. During the Eighth Plan period (1992-1997), different estimates of resource flows to the sector ranged from Rs 14.0 to 18.5 billion per annum, with an estimated share of the institutional finance in the range of 20 to 38 percent (see Table 1.3). Even the limited funds have not been utilized fully, with utilization levels compared to five year allocations at around 80 percent (NIUA, 1997). This hints at other constraints in the system which limit the absorption capability as well as the low priority accorded to this sector. The institutional capacity constraints not only limit the absorption of funds, but also result in poor use of funds with inappropriate investments and inadequate planning and project management. 1.41 Compared to the likely resource flows, estimates of investments needed to upgrade the urban water and sewerage services in the coming years are very large, ranging from Rs. 34 - 302 billion (US$ 0.9-8.3 billion) per annum at 1996-97 prices over the Ninth Plan period (1997-2002; see Table 1.4). These variations reflect different estimation approaches as well as the inadequate information available on existing service coverage levels. Most estimates are based on per capita costs since estimates of the capacity augmentation required is not possible for UWSS given the current lack of basic information. 1.42 Further, these estimates do not capture the likely increases in real costs of providing water and waste water services. For example, according to the World Bank (1996a), the real cost of new water facilities is found to be two to three times the current cost as a result of progressively more difficult project options such as increasing distances of water sources. These become necessary due to the growth in demand of urban infrastructure which is being fueled by demographic pressures, the rise in urban incomes and the expectations of customers. It is further likely that a large proportion of the economic growth as a result of liberalization will be located in or near the urban centers. 1.43 The different estimates of investment requirements clearly suggest that they are far in excess of the likely resource flows to the sector through traditional routes. The Plan funds during the Ninth Plan period for the sector at 1996-97 prices will be around Rs. 117 billion (US$ 3.2 billion) if the past trend in share of this sector in total plan funds continues. Even after accounting for a trend-based increase in institutional finance, there will be significant shortfalls in relation to even the lowest estimates of investment requirements. Interestingly, however, the resources will be significantly enhanced if it becomes possible to tap the capital markets, as indicated by the estimated Rs. 650 billion of investments for urban infrastructure during this period based on the macro-economic projections by the EGCIP (1997). These estimates suggest that urban infrastructure investments could increase to 17.5 percent of total infrastructure investments by 2001. But this presumes enhanced financial viability of the UWSS agencies to attract capital market financing. Even at this level the urban infrastructure investments would be only 1.2 percent of GDP. While from a macroeconomic perspective, enhancement in urban 15  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report infrastructure investments is possible, it would require considerable strengthening of the UWSS providers and major changes in financing arrangements to make this a reality. Table 1.4. Estimates of UWSS investment requirements and resource flows Ninth Plan period (Rs. billion in 1996-97 prices) NIUA EGCIP Nintlh Plan Working Group, MOUAE (1997) (1996) investment Requirements: ..... ................................................................. ...... ..... ~~ ......... ..................... ........................................... Water Supply . 89.2 ..845. 4 283.9 Sewerage 6810 663 9 259.9 ............................................................................. .............. .. ................................................................. Total 170.2 15093 543.8 (na) (17.5) (87.7) ............................................. ..................................................................................... . ..................... .......... ...................... ......................... .............I............................................... Average annual requirements 34.0 301.8 I 108.7 Estimated Resource Flows: ....................................................................... ..................... ...................... ...................................................... Plan Funds 117.0 @ 1.5 percent of total Plan outlay of Rs. 7800 I billion for the Ninth Plan (GOI 1997) Institutional 33 0 Based on a trend estimate of HUDCO disbursements to UWSS. ................................................................................... . ............................................ ............................................ ....................................... ........................... *Total . 150.0 I Average annual resource lows 30 0 Notes : Figures in parenthesis indicate the share of investments estimated to be required to meet deficiencies as well as augmentation and rehabilitation of existing facilities. The MOUAE estimate does not include investments necessary for augmentation and rehabilitation of existing facilities. Sources: NIUA (1997), EGCIP (1997) and MOUAE (1996). Cost recovery in the water and sewerage sector 1.44 While some of the larger municipalities are financially viable and are able to service their debts, most local authorities and utility boards are in financial disarray. The main problem is the lack of incentives for cost reflective, rational tariffs and efficiency improvements in operations and new investments. The importance of user charges in UWSS is crucial. Most finance commissions have recognized this and emphasized the need to move towards a full cost recovery regime. 1.45 As previously stated, cost recovery in the water and sewerage sector has not received much emphasis in most Indian cities. As a result hardly any rigorous analysis of financial viability in the sector exists. While anecdotal information and general discussion with various actors in the sector presents a rather grim picture of sector financial viability, variability of results across cities is worth noting from the limited available evidence. For example, a recent survey reported by MOUAE suggests that out of 17 local bodies, 7 were able to meet their operation and maintenance costs whereas only 2 covered also their debt servicing costs. Analysis of other recent studies suggests that out of the 15 for which information was available, 16  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report only 4 cities cover their operation and maintenance costs completely and another 4 cover more than 80 percent of these costs. Information on coverage of debt servicing (capital costs) was available only for 6 cities, of which three almost fully covered these costs (by more than 90 percent). Thus, from this limited evidence, it appears that for at least half of the cities reported, financial viability at current service levels are attainable with only moderate rate revisions. However, even for these cities, financing investments for needed service improvements will often require considerable tariff revisions to maintain full cost recovery (Mehta and Satyanarayana, 1996d). For other cities, substantial tariff revisions will be required, particularly if debt servicing of new investments is to be done through the sector revenues. 1.46 The main argument for the low sector tariffs has been the inability of the poor to pay. Very little hard evidence exists for Indian cities, however, as to what the poor really spend on obtaining these services. Often, a large proportion of the poor do receive the minimal shared services free or at very low prices. However, the inadequacy of these services forces the poor communities to spend far more in coping costs29 than those receiving a better level of services despite the very low direct water bills they incur. A recent study in Dehra Dun (Uttar Pradesh), for example, highlights this by estimating that those with access to only a public tap spent 6.7 percent of their income on water, if the value of their time spent in collection of water was included in the coping costs. On the other hand, those with access to an individual connection spent only 1.6 percent of their income on water related costs (Choe, et. al., 1996). While there are not many such rigorous studies available for Indian cities, there is considerable anecdotal evidence from many cities which indicates that the poor often pay high prices to purchase water from illegal suppliers in slum settlements or from other private suppliers, especially through water tankers. Tariff structures 1.47 There is considerable variation in the structure of charges for urban water and sewerage in Indian cities, and information is scant. In general, the systems of recovery followed are complex and lack a clear and rational basis. There are three main sets of recovery mechanisms used: user charges, service taxes and other charges, as described in Table 1.4. 1.48 User charges. User charges are prevalent in all the cities reviewed. Rates generally vary across user category or by consumption levels. In almost all the cities, the rates for non-domestic users are considerably higher; with non-domestic rates being 3 to 30 times the domestic rates. In a few cities which have rising block rates by consumption levels, the lowest rates for metered domestic connections are generally pegged to ensure affordable life-line rates. The lowest consumption block is generally kept at 10 kl per month per family. For the unmetered connections, it is common to have fixed rates varying by size of connections. Water supply from shared standposts in low-income communities is either free or provided at very low fixed charges. 29 "Coping costs" include the opportunity cost of time spent in collection, purchase of additional water through illegally tapped services and outright purchase of water from private vendors. 17  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report 1.49 Service taxes. Service taxes for water and sewerage (conservancy tax) that are linked to the annual ratable value of properties are levied in many cities. In many smaller cities, water taxes form a very large proportion of total UWSS earnings, though their share in the larger cities is generally low. Collection of these taxes is usually combined with the general property tax. The oft-discussed problems of property taxes, like low assessments, bias towards self-owned properties and problems linked to the rent control legislation also permeate to the water taxes. More importantly, sole reliance on such taxes does not enable introduction of demand management. Service taxes, when levied in conjunction with user charges may be viewed as infrastructure charges to cover the costs of potential or improved access. 1.50 Other charges. Municipal authorities also levy a variety of other charges including connection charges, development charges and betterment levies. In most cases, however, there is no clear link with actual costs. Some cities (for example, Ahmedabad, Mumbai and Pune) are also exploring the possibilities of land and real-estate based measures such as impact fees. 1.51 Within this system of cost recovery for water and sewerage services, a number of problems are widely prevalent, including: inadequate services for the poor; insufficient metering of connections; absence of indexation or periodic revision of rates; and inadequate accounting and costing systems. 1.52 Inadequate services for the poor. The general approach to tariffs for the poor implies low service levels with an almost free service. For example, it is common to provide standposts and common toilets in low-income settlements with near free charges. Similarly, there are subsidies available for meeting the infrastructure charges for service networks within slum settlements. However, these subsidies are inadequate to fund the service levels required, and are generally not combined with community resources effectively to provide more sustainable levels of services in these settlements. 1.53 Insufficient metering of connections. Most cities have some experience with metered connections. However, their extent and details of their actual functioning is not clearly known. Anecdotal information suggests that in many cases the meters do not work, creating numerous problems. Many cities have also abandoned the practice of water metering. For example, the domestic water metering for half inch size connections were abolished in Baroda during 1981. Water metering was also abolished in Madras and 50 percent of the 85,000 metered connections were out of order in Thiruvananthapuram (Vaidya and Ramchand, 1993). The main reasons that have been advanced for discontinuation of metering are low pressure, alternative wet and dry conditions in water distribution mains as a result of only 2 to 3 hours of supply, poor technology of meters, high supervision costs for the utility, and meter tampering by consumers. There is, however, a successful example of water metering in Pasud, a small city in Maharashtra, where an uninterrupted water service was introduced with full metering quite successfully (Patwardhan, 1991). In some of the larger cities such as Bangalore, better performance on operations of meters has also been reported.30 30 As reported by the Managing Director, Bangalore WSSB at the National Workshop in New Delhi, (see Annex 5). 18  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report 1.54 Absence of indexation or periodic rate revisions. Currently, water charges are not indexed. Thus, even if rates are fixed at cost recovery levels at a particular point in time, inflation ensures that rate revisions, which are politically difficult, will become necessary all too soon. In one of the only examples of an attempt at indexation, the Government of Karnataka authorized the Bangalore WSSB "to revise proportionately, the water tariff automatically, without any further reference to the government as and when Karnataka Electricity Board revises the power tariff." 1.55 Inadequate accounting and costing systems. In most cities, it is often very difficult to correctly assess the service costs due to the poor accounting systems. In addition, proper monitoring of costs and computerization are absent, making it difficult to assess and review the costs to determine the appropriate tariff levels. Many of the state finance commissions have also recognized this problem and have recommended improvements in these systems. Tariff revision procedures 1.56 Local authorities or statutory utilities are governed by their respective Acts which empower them to revise taxes as well as levy and revise the rates for different types of charges. Both the powers and actual practices vary considerably across different states. As these services are treated as public services generally, the local authorities have to frame bye-laws to levy or revise any service charges. The overall process takes up to nine months after which permission from the state government is often necessary. In case of state or city level authorities, permission of the state government is generally necessary for tariff revisions. The process of rate revisions also varies across different states and across the size class of cities. In some states such as Maharashtra and Gujarat, local authorities have greater powers to set the rates whereas in others, rates are set at the state level. For smaller cities the Directorates of Municipal Administration Utility set and/or approve the rates, often through technical inputs from the state boards. 1.57 While systematic evidence on revisions of rates and charges is not available, at least three different influences in rate revisions at the local level can be traced. First, is the role of financial institutions such as the World Bank and HUDCO. Both have had considerable influence on rate revisions in different cities through insistence on enhancing cost recovery as a pre-requisite to project financing. The second influence for rate revisions comes from the state government itself. For example, in the states of Tamil Nadu and Karnataka, the state governments through the urban development departments have initiated rate revisions for water charges in municipalities. The third case is where either the municipal or statutory authority have brought in rate increases without any major outside influences. 1.58 In only a few of the cases reported above, however, does there seem to be any significant attempt at understanding the consumer's willingness to pay and prevailing affordability levels to determine the rates. Thus, on one hand, a rational system of tariff structures is generally lacking and on the other, the authorities do not have a clear idea of effective demand for different dimensions of water and sewerage services. The limited understanding of demand for service and the related affordability issues, result in inappropriate means to devise and approve tariff revisions. An additional concern would be the lack of emphasis on operational efficiency, in 19  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report terms of manpower deployment, for reducing the unaccounted for water and efficiency in the billing and collection systems. The limited available evidence clearly indicates that there is considerable overstaffing for water and sanitation operations, high levels of unaccounted for water and poor collection efficiency. Thus any efforts at moving towards full cost recovery will also need to ensure that the inefficiencies of the public system are not unfairly passed on to the customers. 20  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table 1.5. Types of charges in the water and sewerage services in India Type of charge Specific measure . Remarks Water Charges Metered charges More common for non-domestic (Consumption Domestic meters in most cities do not work Charge) Minimum charges specified in cases when meters do not work A few cities have rising block rates with lowest block at affordable rates to ensure life-line rates Non-domestic charges generally are very high to cross-subsidize the domestic sector Flat rates: More common for domestic sector Generally varying with ferrule size Stand postsi kiosks Generally provided in low income areas * Practices vary from 'No charge / free' to a 'Fixed periodic affordable charge per standpoint' ervice tax Water tax Levied as a percent of Annual Ratable Value of property Variations on type of levy: I . Only a service tax with no consumption charge (Ahmedabad) 2. Alternate system - levy tax or charge whichever is higher, or tax for selected consumers 3. Dual system - Compulsory service tax with additional levy of consumption charge (referred as excess water charges) Sewerage taxi Conservancy tax is generally levied to cover solid waste, and sewerage management, as well as costs Conservancy tax of public health monitoring Water benefit.ta T o cover capital ad doperatin costs of new facilities (Used in Mahaa shtra) Sewerage benefit tax * To cover capital and operating costs of new facilities (Used in Maharashtra) Other Charges Advanced registration Charges vary by purpose for domestic versus non-domestic and by size of connection charges Sometimes collected as deposits Connection fee As per the actual cost of connection Connection charges * A fixed charge levied at the time of taking connection Charges varying for domestic versus non-domestic and by size of connection Development charges 1 Generally levied in relation to property size - varying for domestic / non-domestic. No clear link to actual costs is evident In low income areas, special charges are sometimes levied for slum upgradation Betterment levies Not very common, but used in land readjustment approaches 21  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report 2. THE MUNICIPAL REFORM AGENDA 2.1 A consensus is emerging in India that institutional reform is required if UWSS services are to improve. Many of the sector's current failings stem from institutional deficiencies. A basic problem is the lack of incentives for managers to perform well. There is no mechanism to ensure that managers are rewarded if customers receive good service, and penalized when service to customers is poor. Even when managers try to do a good job, the system is stacked against them. Managers lack the freedom to manage, as a result of administrative controls and political interference. They also lack the necessary resources. 2.2 These systemic deficiencies are created by inappropriate institutional design. Equally, they can be remedied by institutional reform. The key elements of the reform of the institutional framework are: (i) democratic decentralization of responsibility for UWSS services to municipalities; (ii) business-like provision of UWSS services through commercialization of existing providers, private sector participation, and contracting out of operations; and (iii) introduction of mechanisms to ensure customer orientation of UWSS agencies, including in providing service to disadvantaged groups. 2.3 There are a number of important issues which need to be addressed if the reforms are to be effective and for the vicious cycle to be transformed into a virtuous circle (see Figure 2.1). These include: developing strategies to reform existing state-level UWSS providers; providing for regulation of, and comparative competition between, UWSS providers; ensuring the municipalities cooperate, especially when large bulk supply-schemes are needed; and applying the reforms flexibly, according to the size and capacity of the municipalities concerned. In the past, institutional reforms have often meant establishing new institutions without adequate emphasis on the changes necessary in ownership and management structures. This strategy attempts to avoid this pitfall by focusing on the institutional controls, relationships and ownership structures rather than proposals for setting up new agencies. Formation of new institutions should respond to local characteristics, demands and readiness, and not be imposed from above. In approaching institutional reform, the experience of countries such as South Africa, Brazil the Czech Republic and elsewhere is useful. Annex 1, Volume II summarizes the international experience in institutional reform of UWSS provision. A. DEMOCRATIC DECENTRALIZATION AND PROFESSIONALIZING MUNICIPAL MANAGEMENT 2.4 A first step to solving the problems is to create a mechanism which empowers customers. Their demands need to be heard, and the system must provide a reason to take these demand seriously. In a competitive market, customers buy from the producer that offers them the best mix overall of price and quality. However, market mechanisms cannot form the exclusive basis of customer responsiveness in UWSS provision. UWSS service delivery is a natural monopoly-it generally makes sense to have only one provider. There is, thus, little or no scope for competition. Moreover, all customers on a single network receive the same product-it is not possible to provide one house with water treated to a very high standard, while another household down the street gets lower quality, lower cost water. Taken together, the fact of 22  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report natural monopoly and homogeneous product mean that customers need some way to make a collective choice over service levels and tariffs. Figure 2.1: The virtuous circle |d Caunoer i a wit b Adequatept Focus fl \ S~~~~~~~~~~~~ustainal l ~ ~~~ Srvice Good/ustainableiJ l gJ;gIgv KiFb ~~~~~~Finances X dirt lkUWSS Sector AdequaIsb /V Appropriateb Ski i \ MI -Systems/MIS \ ~~~Good gGo -indirt lInfrastructure stituions \ } + l ~~~~~~~~~~~~Appropriate this istebs a o gopoepetAp ropriate . Policies Governance & p Macro/Micro _Management rGoodi =Managed and Operated in accordance with best practice. direct link -- -- - -- indirect link 2.5 This collective choice mechanism should be democratic and local. Democratic, because this is the best way for a group of people to make a collective decision. Local, because the constituents of the decision-making group should, as far as possible, be the people in the area served by a single UWSS network. While it would be possible to create new water customer representative agencies in each town and city, this would be unduly expensive duplication. Municipalities already have a local, democratic decision-making and administration mechanism. Municipalities are therefore the logical agents for consurners in making decisions on UWSS services. In line with the 74th Amendment to the Constitution and the Approach to the Ninth Five Year Plan, responsibility for UWSS services should be devolved to municipalities. Municipalities should thenceforth have authority to discharge this responsibility either directly, or through contracts with service providers. Central and state government will need to support, regulate and monitor municipalities to ensure they act efficiently and in the interests of customers. 2.6 Following enactment of the 74 Amendment in the national government, devolution of UWSS service responsibility has been ratified in most states. Actual implementation of this 23  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report decentralization will, however, require further reform including a transfer of real responsibility and resources from state to municipal levels. Many of these reforms will involve increasing municipal autonomy, and professionalizing urban management. These are topics in their own right, which a report on UWSS cannot do justice to. They are addressed in more detail in the World Bank's Urban Infrastructure Services Review report (1997). 2.7 This section highlights those municipal reforms most relevant to UWSS, namely: professionalizing municipal managers; improving accounting and procurement; and developing a long-term planning orientation. These improvements can be achieved over time through a combination of: sharing of good practice between municipalities, with encouragement from the concerned state government and external agencies; legal requirements from the state government establishing minimum standards and procedures in selected areas; and technical assistance in response to demand from municipal authorities. Where legal requirements are established, they should generally be enforceable by citizens and organizations, as well as by state government. Professionalization of urban management 2.8 City management requires specific skills. Although many Indians are skilled in engineering, planning, finance and economics, fewer are practiced in applying these skills in urban management. In addition, the emphasis in the strategy on customer responsiveness and serving disadvantaged groups means that municipalities will need professional skills in communications, community development and community health. Again, these skills exist in India, but are not widely deployed in municipal management. 2.9 The common practice of employing insufficiently skilled, frequently-rotated senior municipal managers leads to a lack of long-term focus and local commitment. It is recommended that options for local government reform to address this weakness be explored. Developing a professional cadre of urban managers is likely to require input from professional and training institutions, and recognition of specific skills in training and certification. 2.10 Within municipalities it will be important to define the roles and responsibilities of elected representatives vis a vis senior municipal management. A useful analogy here may be the relationship between a company Board of Directors-which makes strategic and policy decisions and monitors the chief executive's performance-and company management, which presents options to the Board, and is responsible for operations to implement the Board's decisions. 2.11 Professionalizing urban management and ending political control over operational decisions will be a difficult challenge. In pursuit of this objective, it will often be desirable for the senior management group to develop direct links to businesses, customer groups, etc. This will provide them with independent information, and assist them to build consensus for effective urban management. State governments and other external agencies can help by providing examples of good practice in the relationship between elected officials and city administration, and model by-laws or municipal constitutions to govern these relationships. 24  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Improved accounting and procurement systems 2.12 The accounts for UWSS should be separate from the accounts of the municipality.3' This reform could be required by state law. The UWSS accounts should be established on regular commercial principles. Transfers to and from the municipality should be identified, and all accounts should be audited by professional auditors. Support will be needed in the form of examples of good practice. Professional bodies, and training institutions, will need to develop accounting guidelines and practices, and training and certification for professionals. The Institute of Chartered Accountants of India has already started work in this area. Market-oriented financing mechanisms (see paras. 4.34 to 4.42) will provide additional pressure for proper accounting. 2.13 In addition, the problems related to conflicts of interest and corruption will need to be attended to, through more rigorous audit requirements and introducing transparency in procurement. Good practice in this area will include: ending undue contractor influence over planning-the customer responsiveness mechanisms outlined above will help here; transparency in procurement; involvement of private companies in management of procurement, on a contractual basis; audit arrangements; an independent agency charged with investigating corruption, combined with strong penalties; and higher salaries, and rewards for good performance, to reduce incentives for corruption. State governments will wish to pass laws governing some of the above areas, especially requirements for audits, investigation and transparency. Long term orientation in planning and financial management 2.14 Efficient UWSS provision requires a long term orientation. Each municipal administration should prepare an integrated plan for the city's infrastructure needs. On the basis of this plan, the municipality should forecast capital requirements, and plan how the capital will be raised and serviced. These plans should be considered and approved by the elected representatives, and also made public. Publishing the plans will allow citizens to check that they are sustainable and appropriate. Municipalities will need assistance in the form of training, technical assistance, and perhaps grants, to facilitate establishment of the planning process, and to employ specialist consultants to assist them. State governments may require municipalities to prepare integrated development plans, and specify their form. Integration with other reforms 2.15 In implementing decentralization, it must be borne in mind that while municipalities are the best available agent for consumers, they suffer from a number of weaknesses. This strategy aims to address those weaknesses through a comprehensive and inter-locking series of reforms. Table 2.1 shows how all these reforms contribute to producing a system which provides democratic decentralization while correcting for the problems inherent in municipal responsibility for UWSS. 31 Accounting separation is a minimum. Section B discusses complete organizational separation of the UWSS provider and the municipality. 25  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table 2.1. Strengthening decentralization to municipalities Weakness Description Addressed through ...................................................................................................................................................... ................................................................... Excessive state Over the last forty years, a number of state Professionalizing municipal government governments have taken over responsibility for management. * control .. many traditionally municipal functions, including development of UWSS infrastructure. As a result Reform of state UWSS providers to municipalities' status and powers have been make them responsive to reduced. The progressive implementation of the municipalities, and devolving 74' Amendment will return powers and functions decisions to municipalities and their to municipalities, but it will take time to restore customers their ability to exercise these powers effectively. ......................................................................................................................................................... ......................................... Municipal Special purpose agencies with statutory powers Professionalizing municipal * capacity have deprived municipalities of their traditional management. functions, and their ability to act as overall city managers. This has led to an erosion in their capacity, lower status of municipal management, service provision to specialist and frequent rotation of generalists into municipal UWSS providers. management positions which contributes to the Tailor reforms to the size of the lack of municipal capacity. municipality, and provide Municipalities lack the technical skills to manage additional support to small and UWSS provision. medium sized municipalities. Small municipalities suffer especially from low capacity. Desire to avoid Generally, citizens will vote out those who serve Require municipalities to supply accountability them poorly. To make decisions on how well a information to citizens, and consult. government is serving them, citizens need Strengthen civil society. information. This gives incumbent governments the incentive to withhold or distort information, to make it harder to assess their performance. Pro-rich bias For many reasons, from shaing simiar Institute mechanisms to require backgrounds through to greater ability of the rich responsiveness to disadvantaged to organize and lobby, municipalities can be more groups. Integrate provision to responsive to the rich and influential than to the disadvantaged groups with poor and disadvantaged. Policies expressed as mainstream provision, and build being for the poor often have the effect of serving democratic grass roots mechanisms the better-off. to enable their participation in decision making.. Private sector and NGO participation can assist the disadvantaged. * Short-termist The election cycle encourages governments to be Professionalize municipal biased toward actions which yield results before management, including mandating the next election, and against actions which long-term planning require investment or sacrifice now, for gains later. *This is a particular problem in UWSS, where long- Providing information to customers term planning and investment is essential and involving the private sector will also help .......................................................................................................................................................................................................................................... 26  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table 2.1 (cont.). Strengthening decentralization to municipalities Weakness Description Addressed through ........................................ ............................................................................................................... .......................................................................... .Political Politicians often want to control detailed Professionalize municipal interference in operational management issues, rather than management. Invest them with management confining themselves to their strength of setting decision-making authority and priorities and choosing among alternatives at a responsibility strategic level Contract out operations to specialist UWSS providers, with a clear demarcation of responsibilities ................................................................................................................................................................................................................................. Incentives for Public office affords politicians and administrators Professionalize municipal corruption the opportunity to use public resources for private management gain. Particular problems in the water sector include the tendency for contracts to be structured Providing information to customers and awarded in response to favors from and involving the private sector will contractors, and for meter-readers to under-record also help consumption in exchange for direct payments from consumers .................................................................................................................................................................................................................................. Parochialism Often local governments prefer solely local Require cooperation between solutions, and avoid more efficient solutions which municipalities, retain some state- involve cooperating with other municipalities level coordination role B. COMMERCIALIZATION AND PRIVATE SECTOR PARTICIPATION 2.16 While the above reforms will ensure that customer demands are effectively transmitted to UWSS providers, it is also essential to ensure that these providers have the ability and incentive to respond effectively and efficiently to those demands. UWSS providers should be run on commercial lines, and should contract out responsibility, where feasible, to specialist UWSS providers who similarly operate on commercial lines. They may continue in state or municipal ownership, but they should be financially viable, have proper accounting systems, and managers with the freedom to manage. At the same time, they should be accountable to municipalities and customers through clear contracts. 2.17 Experience in India and internationally has shown that involving the private sector in UWSS provision can further boost efficiency and service standards while improving service to currently unserved disadvantaged groups at reasonable cost. Progressive involvement of the private sector in UWSS provision confers management skills, capital and performance incentives typically lacking in the public sector. States and municipalities should thus explore a variety of public-private partnerships in UWSS provision. These could include contracting out services, having the private sector build and operate new infrastructure, and selling shares in state-owned UWSS providers. 27  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Commercialization and contracting out 2.18 It will generally be good practice for municipalities to discharge their UWSS responsibilities through a contract with a separate entity, rather than directly through a department of the municipal administration. The municipality itself should set policy, agree on improvements in coverage and service levels, and ensure coordination with town planning and other functions. Actual operation should be delegated to a specialist operating company, which can develop a commercial focus and a high level of technical and professional skill. The operating company may be a corporatized state owned enterprise, or a fully or partially private company (for New Zealand and Czechoslovakia cases, see Box 2.1). In either case, the service provider should be financially viable, including earning a return on capital invested.32 2.19 The contract between the municipality and the UWSS provider should generally define a concession zone. The provider will be responsible for UWSS services within this zone. This can include responsibilities to extend supply to slum areas and the urban periphery. This approach has been successful in extending and improving services in many other countries, including Chile and Argentina, and will similarly yield benefits for municipalities in India. 2.20 The advantages of commercialization and contracting out include: (i) separation of policy and operations; (ii) rational decisions over inputs; (iii) accounting improvements; and (iv) economies of scale and technical skills. First, politicians set policy, and managers are free to manage. Managers are given commercial autonomy, but held accountable for performance against the UWSS service provision contracts, and for the commercial success of the company, as reflected in its accounts. The contracts will define coverage and quality requirements as well as a tariff setting mechanism. Second, by escaping direct government control, the company will be free to set salaries to attract the necessary skills, to recruit on merit, and reward performance. It will be able to make business decisions to invest in such activities as improving billing and collection, UFW reduction and in training and human resource development. Other inputs will also be procured commercially, not bureaucratically. In time, some of the companies will be able to borrow. Third, as a company, the UWSS service provider will be required to keep proper audited accounts. These accounts will be separate from the municipality's own accounts, making it easier to identify the true cost of UWSS services, and making subsidies explicit. Smaller municipalities will not be able to employ specialists, or reap economies of scale in areas such as billing, procurement, and asset management. By contracting with a service provider, who may operate in several municipalities, small municipalities can gain specialist skills and benefit from economies of scale. 32 Financial viability will not necessarily conflict with achieving social objectives. Rather, it requires that social objectives are clearly defined and explicitly financed (refer to paragraphs 4.20 to 4.28). Options include: cross-subsidies, if the service to the concession area as a whole is profitable. This is the approach adopted in Buenos Aires; government transfers directly to poor consumers, as in Santiago, Chile; or; subsidies paid to the provider in exchange for it undertaking social obligations, as in Trinidad, Puerto Rico and Guinea. The approach depends on local circumstances, but the international evidence is clear that commercialization and private participation in UWSS provision can improve service to currently unserved and disadvantaged groups, at reasonable cost. 28  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Box 2,1. Alternative approaches to efficiency gains - the traditional parastatal model vs. the State Owned Enterprises (SOE) model The traditional parastatal organization is common around the world. It has generally failed to deliver appropriate services efficiently. In contrast, corporatization, an example of which is the State Owned Enterprises model, has been employed successfully in countries including New Zealand and the Czech Republic. The traditional parastatal model Traditional parastatals such as the Indian state water boards, are stand-alone entities usually established under specific legislation, and subject to both considerable political influence as well as to detailed controls over types of resource used to produce their services (such as staff ceilings, controls on various types of expenditure, very detailed investment and borrowing controls). While parastatals have largely commercial functions, they tend not to be run on a commercial basis and are not accountable in the ways a private sector company is. Traditionally, parastatals have had conflicting, often unstated objectives (e.g. employment creation and service delivery), making it difficult if not impossible, for their managers' performances to be assessed. This difficulty in making managers accountable is compounded by the lack of transparency common in parastatals. Corporatization - the State Owned Enterprises (SOE) model SOEs share some characteristics with traditional parastatals - they are stand-alone entities with separate accounts and specific functions. However, they differ in that the SOE model has the institutional potential to apply private sector governance and regulatory mechanisms, as far as possible, to a public sector organization. This means that where parastatals have conflicting objectives, SOEs have clear commercial objectives, with profitability a clear indicator of management efficiency. Where parastatal managers are constrained by regulation and political directives, the SOE chief executive has full management authority, equivalent to the CEO of a private company. Elected representatives in charge of parastatals not only set policy, but may deternine operational decisions. In the case of an SOE, the elected representatives must limit themselves to annual approval of proposed strategy, and appointment of the Board. Both SOEs and parastatals have Boards appointed by elected representatives. However, in the SOE model the Board is appointed purely on the basis of commercial ability, and is responsible solely for the commercial success of the entity. The SOE model offers significant improvements over the current system. Its major vulnerability is that political control over operational decisions may continue or re-emerge, even though the formal legal strucures are designed to prevent this. Thus where political interference is extreme, an SOE would essentially retain all the problems of a traditional parastatal. Private sector participation 2.21 The Government of India has for some time recognized the value that private sector participation (PSP) can add to water services. The Eighth Five Year Plan states: "Private sector efforts for construction and O&M of drinking water projects should be encouraged and mobilized to the maximum extentfeasible. " [p.3801. PSP can yield improvements in water services by: providing additional management skills and improved management incentives; making politicians concentrate on policy decisions, leaving professionals free to make the operational decisions necessary to implement that policy; and providing additional finance. 2.22 It is common to emphasize the private sector's role in supplying finance, and downplay its role in improving management. It would be a mistake to do this in India. High political risk and low levels of cost recovery mean that private investment in water and sanitation will initially be limited, often high cost, and may lead to disappointment. For example, one of the reasons for 29  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report the failure of the attempt to let a BOT contract for a new water treatment plant in Hyderabad was that the private operators' bids for tariffs were far higher than expected. However, there are widespread opportunities for private participation in management and operations. Properly handled, such involvement will lead to rapid improvements in service and efficiency, as the experience of cities such as Chennai and Rajkot show (see Box 2.2 and 2.3). This is valuable in itself, and will also pave the way to attracting private finance in the future. Box 2.2. Chennai service contracts In Chennai, formerly Madras, the operation and maintenance of 14 sewage pumping stations was contracted out in 1992. The success of this contract led to further contracting out of an additional 61 pumping stations, on a mixture of two and three-year contracts. In addition, the operation and maintenance of four water boreholes has been contracted out and it is planned to extend this to a new water treatment plant and a new sewage treatment plant. The contracted-out stations have achieved cost savings of 45-65%, compared to the Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB). This has been achieved without any compulsory redundancies, instead, CMWSSB has re- deployed excess staff to vacancies resulting from retirement elsewhere within the organization. Box 2.3. Contracting out in Rajkot Rajkot, like many other cities in India, has contracted out a number of municipal services to private firmns as well as community groups. The most prominent of these are solid waste management, and maintenance of street lights, public toilets and gardens. Other services include recreation services and afforestation. While this has led to some cost savings, (estimated at 5 percent of the total revenue expenditure on service provision), the major purpose has been rationalization of labor management within the Corporation. This has been done without any effort at retrenchment (which, in any case, would be impossible given the labor laws) but by freezing new recruitment for existing vacancies. Contracting has also helped the Corporation to increase service coverage for essential services and provide extra services (like aviary, aquarium and afforestation) which may not have been possible otherwise. In case of neighborhood gardens, maintenance has been handed over to local residents with positive results. RMC has been careful in controlling the extent of contracting out to ensure the public department has the capacity to provide essential services in the event of service disruption. More studies are necessary to assess the effect of competition on costs and service perforrnance. Source: RMC (1993), as reported in Mehta (1993). 2.23 There is a great variety of possible forms of private sector participation to draw on. Table 2.2 summarizes a number of the common types. Considerably more information on the options and the international experience is provided in Annex 1 of Volume II. The main lessons from these experiences are that: (i) it is desirable to develop public-private partnerships, with political (and sometimes financial) commitment from the government; (ii) contracts need to be carefully developed, to ensure proper incentives for the private sector to achieve efficiency (see Box 2.4); (iii) adequate preparation is necessary before undertaking long-term private sector participation options, especially gathering detailed information on existing assets and the potential for financial viability; (iv) where BOT or utility-wide concessions are not possible immediately, corporatization of utilities, tariff reforms and a series of management contracts will pave the way for greater private sector participation; and (v) contracts should ensure that disadvantaged groups are served, through providing appropriate incentives and explicit subsidies if necessary. 30  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Box 2.4. Lease contracts - the case of Guinea, West Africa Guinea has had a lease contract in place since 1989. The primary aims of this contract were to improve efficiency in the urban water sector, expand service coverage and make the sector financially viable. Following a competitive bidding process, in which bidders were evaluated on the reduction they offered against a benchmark tariff calculated by consultants, a consortium of two French water companies took a 51% share in the operating company (SEEG) holding the lease contract. The winning bid offered a discount of 30% on the benchmark tariff. The government retained the remainder of the shares, and also 100% ownership of a separate holding company (SONEG) which owns the sector's assets, receives the lease payment from SEEG, and finances investment. Initially, tariffs were well below cost recovery levels. To allow time for service improvements to reduce opposition to tariff increases, and for households to adjust, tariffs were increased gradually to cost recovery levels. In the interim, the World Bank Group provided funding to cover the difference between costs and revenues. The introduction of PSP has been generally successful. Connections have risen from 16,500 to 33,500, and service coverage has increased from 40% to 52% of the population. UFW, after peaking at 62% in 1993, has declined to 47%. The utility is now financially viable, with a ratio of operating costs to operating revenues of 71%, compared with 122% in 1988. There have been some problems with PSP in Guinea. Tariffs have now increased to around Rs 32/n3 (US$ 0.90/in3). As a result, around one-third of connections are inactive. Additionally, the split between maintenance, (the responsibility of the operating company) and investment (the responsibility of the holding company), creates incentives for SEEG to skimp on investment so that SONEG is forced to invest in rehabilitation. 2.24 The water sector in India, however, presents a significant array of barriers to PSP, including: there is little awareness of the potential gains from the private-public partnerships in the sector; a misperception that PSP will deliver cheap capital; low tariffs and lack of financial viability; and lack of information and capacity needed to negotiate and monitor complex arrangements. These barriers create apprehension amongst municipalities and lead to high risks for potential private participants. They are overcome through an incremental approach which yields early and demonstrable successes. This approach would start with: * easier types of PSP, including management contracts, service contracts, contracts to operate discrete treatment works, and financially viable BOT contracts serving thriving industrial areas. These types of PSP have already started in India (see Box 2.2 and 2.3). They will build financial viability, and experience in private public partnership, paving the way for more ambitious forms of PSP such as concessions in the future; * favorable local conditions, such as: a pressing need for new infrastructure or other service improvements - this creates the demand for change; or a change champion-this may be a strong municipal commissioner, the state government, or a consumers' group; and a strong revenue base, to reduce the financial risk to the private sector; and * demonstration projects, in which central and state government, and external agencies will provide encouragement, technical assistance and financial support to selected municipal authorities to involve the private sector. Such projects could vary from a development bank-assisted concession in a mega-city, to an incentive-based management contract for reduction of unaccounted for water. Lessons from the 31  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report demonstration projects should be widely disseminated throughout the country, to catalyze the reform process. C. CUSTOMER RESPONSIVENESS AND THE ROLE OF CIVIL SOCIETY 2.25 Special measures will be needed to ensure that municipalities and UWSS providers are responsive to customers. These should include requirements to consult in a meaningful way with customers. Through consultation, provision of information and other support, municipalities should encourage the development and involvement of civil society, in the form of customer associations and citizens' groups. Disadvantaged groups, especially slum dwellers, have been particularly poorly served by the current system of UWSS provision, and often poorly served both by the democratic process and by the bureaucracy. Additional measures will be needed to ensure that they receive a good quality, affordable UWSS service. These will include requirements to consult with and involve disadvantaged groups in service planning and delivery; integrating plans for serving slum areas with planning for the city as a whole; and provision of explicit and well-targeted subsidies. 2.26 The central aim of the reforms is to make UWSS responsive to citizens' needs. Democratic decentralization, commercialization and private sector participation will help, but will not be sufficient. Additional mechanisms and actions are required. These revolve around providing information and customer consultation. Without information, consumers find it difficult to monitor the municipality's performance, or suggest changes. Types of information which should be published include: financial-cost of operating the service overall, and by scheme or part of city etc.; coverage and services levels-reliability of supply, water quality, etc., disaggregated by part of city (see Box 3.5 for an example of such information provision); and plans - new schemes, the improvements in coverage and services levels they are intended to provide, and the cost and tariff implications. 2.27 While the nature of consultation with customers will differ in large cities versus smaller communities, all effective consultation should: include an active duty on municipalities to reach out to all groups, especially those which are disadvantaged by conventional political processes, such as slum-dwellers, women, and scheduled castes and tribes. They should also be designed to encourage the development and participation of organized civil society as well as individuals, and include a duty to take the results of the consultation into account. 2.28 An effective strategy is likely to be to start consultation at the ward level on current service delivery. This should be linked to existing ward committees. Often simple or inexpensive operational changes will be possible to respond to consumers' wishes at low cost. In time, more elaborate consultation processes linked to planning investments and service improvements can be developed. Municipalities will need to manage these consultations to prevent inconsistent wish-lists emerging, and to ensure that people understand the cost implications of potential service improvements. 32  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report Table 2.2. Options for Private Sector Participation Option Example Operation Management . Maintenance Investment Ownership of Duration of system assets (Years) .____ ____ _______ a~ b c Planning Financing . Service Chennai Public sector 1-5 contract anagement Puerto Rico, bic sector -5 contract Trinidad & Tobago ....5 - - iii..wii,;>;- ;;: .................. ................ ......... ... ...... ..9iii_i;v s tyez OOT(ew T ,N*5>tt5v,, .............................................. ............. ..........--- BOOT (new ~~~~~~~~Thailand Copany- 1+ assets) I#~,l,. *...Public sector Lae.OtaaCeh ;. . ..................... ............................ Pb etr. ................ ....102 Lease ~~~~~~~~~~Guinea, Pbic sector 10-20 Ostrava (Czech) .~. CnesoBunsAes SSBvmBa ................ ............................................. .......ea.aa... a .............................. Cocession Buenos Aires, Public 120-30 Manila sector2 Asset sale England& Wales Company Perpetuit Notes: 'Three different functions exist: planning (a), carrying out the work (b), and financing the maintenance (c) 2 The assets are transferred to the concessionaire for a fixed period of time but are owned by the state Key: Solid shading: responsibility lies with the private operator Clear: responsibility lies with the public sector Diagonal shading: responsibility varies according to the contract 33  India Water Resources Management Sector Work Urban Water Supply & Sanitation Report 2.29 It is self evident that Both information provision and consultation must reach out to customers. However, some current approaches are not good practice (e.g., publicizing information by making one copy available in a municipal office is not commonly followed in India). Materials need to be presented in languages and formats which the target audience understands. The media for consultation will include press releases, newspaper advertisements, brochures and public meetings. State governments and external agencies can provide examples of good practice, and guidance. International examples of good practice include the UK Market Planning exercise, municipal and regional Resource Management Planning in New Zealand, and the requirements for customer consultation in development planning being adopted in South Africa. 2.30 State governments may also mandate the format of consultation. This can include specifying the information to be provided, placing a legal duty on municipalities to actively reach out to all groups to ensure they are informed and their views are heard, and a duty to take account of the results of consultation in planning service delivery and improvements. The recent initiative by GOI (Department of Administrative Reforms and Public Grievances, April 1997) and the Government of Himachal Pradesh to establish a Citizen's Charter is an example of good practice that other states could follow. 2.31 The move towards greater consumer orientation by UWSS providers also necessitates the presence of strong consumer associations and other forms of civil society associations, to coordinate and voice consumer demands. A few examples already exist, such as the Civic Affairs Centre at Bangalore, Ahmedabad-based groups, specifically Consumer Education and Research Society, AMA Centre for Management of Civic Affairs, and Foundation for Public Interest. Water, sanitation and public health issues are also addressed by other citizens' groups such as the Swabhiman Movement in Bangalore (see Box 2.5 and Annex 2), Bombay First for Mumbai and the newly formed Ahmedabad Citizen Trust. While there is considerable potential in these organizations, most are relatively new, having been formed in the second half of the 1990s. Bor ZA. Swabhiman Movement, Bangalore 9Swabbiman, a citizen nitiative in Bangalore launedi 195, motivates and filitates organization of residet grto Ss neigb ood problemsiand offes a platfor bor civi