Suddenly, water is being assessed as a commodity in rhetorical, and accusatory terms. For citizens who are only looking at a genuine and primary need that cannot be satiated by alternative means, such a war of words only wounds further. A closer look at the issues related to funding, contracting, pricing, and thereby managing water supplies, appears timely.

70 per cent of the total financial flow for urban infrastructure needs are met from budgetary allocations; institutional lending ranges from 20 per cent to 25 per cent, and the balance is through external aid. A great part of the funding therefore comes from plan (government developmental plans) allocations. Such allocations are far less than what is required for the provision of these services. Moreover, the break-up of these funds to different municipal authorities is generally driven by political considerations and does not follow any rigorous project preparation and appraisal process.

Additionally, urban local governments across India are in extremely poor financial health and households cannot support the required investment to improve services. An inherent problem with the Urban Local Bodies (ULBs) in India is that they do not have a separate budgetary system which shows discrete revenue and expenditure items for their water supply and sanitation activities. Consequently, the ULBs do not even have a reliable estimate of how much it actually costs to provide water supply and sanitation services within their jurisdiction.

The Urban Infrastructure Report (UIR) 2004 points to the lack of expectations from the consumers, believed to be the strongest impediment to improving water supply in urban India. Any water supply improvement program, the report notes, will only succeed if society desires it, that is, it is willing to pay for it and, in the long run, rewards policymakers for delivering it. Systematic denial and long years of poor quality supply make people get used to the supply as it is, so they are unable to imagine a significantly better quality good, or enhanced availability.

A study by the UIR 2004 (Peeyush Bajpai and Laveesh Bhandari) groups the urban water user as belonging to one of the following five categories: Low Need-Low Economic Status, Low Need-Medium Economic Status, Low Need-High Economic Status, High Need-Low Economic Status, High Need-Medium Economic Status, and High Need-High Economic Status.

The study shows how less than 10 per cent of all urban households belong to the Low Need-Low Economic Status group, whose need is presently nearly satisfied. This group is also not in a position to pay for improvements. It is recommended that O&M (operations and maintenance) expenditure would have to be borne by the government in this case, and since across the board rate increases will meet the stiffest resistance in the low-income neighborhoods, a large proportion of households will need to be insulated from such increases.

The Low Need-Medium Economic Status group may be willing to bear nominal user charges but is not likely to support price increases.

The Low Need-High Economic Status that comprises 14 per cent of urban households will have the inclination to pay premiums for better quality of supply: Cleaner water with low levels of dirt, minerals, and biological matter, as well as a 24 hour supply though they may not be so concerned about improvement in access.

The High Need-Low Economic Status group is the largest in terms of the total urban households. Their low economic status stands in the way of improvements and budgetary support of infrastructure investment is a must.

The High Need-Medium Economic Status group stands at 8 per cent of total households; they are more likely to be able to cover user fees but have limited ability to generate funds for improvements.

The High Need-High Economic Status households, nearly 4.4 million in urban India, can undertake both the one time capital investment required for improvement as well as pay recurring charges towards maintenance of services—they are likely to be supporters of credible government initiatives in water infrastructure.

The study also points to the fact that 40 per cent households are willing to contribute financially in some way and another 30 per cent are willing to put in their own labor for the purpose of improved water supplies.

Studies have shown that even slum households are willing to pay, and prefer a combination of volume and low connection charge. In Vijayawada, for example, where the Municipal Corporation is responsible for household connections, a connection fee of Rs.4,000 per month plus a monthly fee of Rs.40 was being charged in 1999. Stand posts were dysfunctional and leaking. A cut to Rs.2,000 generated a huge response from slum dwellers, and household connections were laid.

In Baroda, water supply services cost an average of 1.7 per cent of the household income. Poor households were found to be willing to pay Rs.275 per annum as against the prevailing Rs.43. Wealthier families were willing to pay Rs.440 against actual charges of Rs.200.

The Public Health Engineering Department in Ajmer, Rajasthan, has privatized the operation and maintenance of the filtration plant, pipelines, and pumping stations of the new water supply scheme from Bisalpur Dam, under the aegis of the DFID (Department for International Development, South Asia Region). The new Bisalpur Dam scheme on the river Banas supplies water to 6 towns in Ajmer district, namely, Ajmer, Beawar, Kishangarh, Nasirabad, Kekri and Sarwar, through 112 kms (69.59 miles) of pre-stressed cement concrete pipelines and 5 pumping stations, managed by private contractors.

Political pressures have kept user charges low with much larger indirect and hidden costs as a result. Inefficiencies in water supply and use add to costs considerably. There are also ‘coping’ costs that include time spent queuing for and purifying water, and the use of domestic tanks and pumps. Both private vendors and bottled water, an increasingly visible option in Indian cities, cost more than piped water. Social costs of hoarding water due to irregular supply and then wasting it must also be included in the final tab.

In the Indian context, the UIR 2004 recommends well-designed and chosen contracts in Public Private Partnerships (PPP) that improve governance and secure the maximum value. Civic society and social institutions have important roles in play in making partnerships work and ensuring effective coordination. In the provision of public services, both the markets and the government have been known to fail. Therefore, the report explains, PPP is considered to be one way to overcome the specific weaknesses of each.

However, experience in different parts of the world has shown how contractual forms give too much bargaining power to private parties, resulting in major concessions and subsequent failure to meet expectations. In the water ‘business’, bidding low and renegotiating later is considered an acceptable way to secure the contract. This results in some increase in coverage of the poor, and in the slum areas, but the companies exaggerated the benefits. Transparent contracts with clear dispute resolution mechanisms and the involvement of all stakeholders in the negotiation are needed.

The UIR points out how companies would provide a single water main to a group, who would then set up a committee and hire a contractor. The company would charge the committee but count each household as a connection. Since the charge is higher for higher water consumption, these poor households end up paying more. But companies encountered problems both in collecting user charges and in reducing leakage and theft though, by installing meters near the mains, they managed to bill the households for distribution losses that took place further down the line. These experiences diluted the enthusiasm for the private provision of water, originally propounded with great enthusiasm in the 1990s, with the World Bank as the dominant international voice pushing for private participation.

Instead of allowing transnationals to borrow money locally and recover money from user costs with their only contribution being management inputs minus the experience of local conditions, the report recommends building governance structures that allow public utilities to run on more commercial lines. Also, some privatization may be required to improve efficiency but better regulatory controls are required to ensure safe, affordable, high quality environmentally sustainable water supplies. At the same time, it is necessary to strengthen the ability of the governments to meet water needs.

It is essential to do contextual analysis and decide on the specific form of outsourcing. Only then can insights be found into the ideal features of the contracts to be entered into. The main objectives in a developing country are to maintain the quantity and quality of supply, to prevent wastage and to conserve limited supplies. Contracts must also be designed to maintain some competition in water supply provision to ensure consumers get a better deal. Both foreign and domestic firms lack experience in Indian conditions; the report recommends both service contracts and the occasional management contracts to acquire such experience.

The UIR 2004 recommends price reform in water services, and the establishment of independent regulators free from political interference which holds the key to improvement in water supply. Regulators must not be from water utilities, retired government insiders (as has happened with the first few regulatory commissions set up in India), or be elected. The large international experience in the functioning of regulatory commissions can be drawn upon.

Pricing must provide good incentives for conservation in water use, efficiency in water production, investment, and financing, and efficient allocation of risks among consumers, utilities, and taxpayers. Water contributes a very high level of utility at low levels of consumption. It also has many non-essential uses. Therefore, utility at high levels of consumption may be very low. This makes demand inelastic at low levels of consumption but very elastic at high levels. Pricing must take this into account. The differentials between the rich and the poor, the former indulging in highly affordable wastage while the latter struggles with the coping cost of waiting for minimum supply, are concerns that need urgent redress.

Piped water supply has the unique feature of quantity rationing. Managers can just turn off supply to whole areas, and cut demand to fit available supply. This is a disincentive to extending metering more fully. Citing largely constant household demands, they prefer to fix a daily amount and shut off valves after dispatching this quantity. But a study in Uttar Pradesh found that a 50 per cent fall in domestic water consumption upon the installation of full metering. An ADB study shows 67 per cent metering in Mumbai (among the most successful Indian examples of urban water supply) as opposed to 0 per cent in Kolkata, 94 per cent in Colombo and 100 per cent in Malaysia, Indonesia, and China.

Instead of the present system of a steep hike in water charges by local bodies once in five years, which is met with typical consumer resistance, a 10 per cent annual increase is recommended. Improved metering and billing, based on efficiency prices with less dependence on non-transparent fixed charges, will also improve the quality of service. Improved quality of service will result in increased willingness to pay. Entrepreneurship has to be encouraged and the local community strengthened. Citizens groups have the voting power to motivate politicians and change the focus from direct subsidies and hidden costs to the delivery of quality services. Together, all of the above being features of an ideal water service.