Thursday, September 20, 2012

Outsourcing urban water sector services

This blog has consistently argued that outright privatization, especially in certain sectors like urban infrastructure, stands very remote chance of success in countries like India. Instead, a more realistic route to bring private participation in urban infrastructure services is to un-bundle and outsource specific service categories.

In particular, though water and sewerage has been the subject of several explorations at private participation, there have been very few successes. Conventional wisdom has it that the biggest impediment is the low prevailing water tariff and the political difficulty of achieving cost recovery by commercial pricing.

In this context, a nice study from CRISIL questions conventional wisdom and suggests a model for private participation in urban water sector. It examined nine water utilities and finds that a lifeline supply of water (80 lpcd or 12 kl per household per month) can be delivered with reasonable commercial tariffs, which are much smaller than the monthly electricity bill though higher than the current water rates, while ensuring operations and maintenance (O&M) cost recovery. The graphics below tell the story.

The critical element in the model suggested is the assumption that the capital expenditure be made by the urban local body, while the O&M will be outsourced to a private agency and cost recovery achieved through commercial pricing. This itself is a significant achievement given that only 7 of the 65 cities covered by the flagship urban renewal program currently achieve O&M cost recovery. Such concessions stand the best chance of success in highly sensitive sectors like water. But there are a few concerns

1. The study uses the O&M expenditure currently being incurred by the utilities. This can be a misleading indicator since this is most often far lower than that required to manage the network optimally. The shoe-string reactive O&M, borne out of the utilities' budgetary constraints, most often ends up increasing maintenance costs and contributing to service quality problems. If the higher O&M costs are taken into account, then the commercial tariff for cost recovery could be much higher.

2. In the circumstances, it may be required to keep the tariffs for the urban poor as low as possible and achieve cost recovery through an appropriately designed Increasing Block Tariff (IBT) structure that charges higher rates on the bigger consumers.

3. The most important element will be in the details of the concession structuring. Factors like the baseline supply standards, obligations of the service provider, extent and scope of services outsourced, and so on need careful attention since they are typically the elements that derail such concession agreements.   

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