Urban Water Pricing: Setting the Stage for Reforms. - Indian Institute ...

Urban Water Pricing:Setting the Stage for ReformsOm Prakash MathurSandeep ThakurSeries Editors:Aasha Kapur Mehta, Pradeep SharmaSujata Singh, R.K. Tiwari2006

Chhattisgarh Infrastructure ReportAcknowledgmentsThe substantive contributions to the paper made by Dr. Govinda Rao, NIPFP, Dr Dale Whittington, University ofCarolina, Dr. Albert Breton, University of Toronto, Dr Kim Cuenco, World Bank, and participants of a UN-ESCAPRegional Workshop on Pro-Poor and Sustainable Urban Water and Waste Water Management at Thailand are gratefullyacknowledged as is the support provided by Mr P.K. Deb, Joint Secretary, DEA, Mr. S.Banerjee, former Joint Secretary,DEA and Mr. Maurice Dewulf and Dr. Pradeep Sharma, UNDP. Ms Rekha word processed the paper at NIPFP.

Table of Contents1234The Importance of Urban Water Pricing 1Urban Water Pricing: Instruments and Methods 5Water Pricing Experiences: A Four-City Survey 10Water Pricing: Setting the Stage For Reforms 17Annexure 22Glossary 24References 25

Chhattisgarh Infrastructure ReportList of Tables, Boxes and FiguresList of Tables1. Water Tax on Annual Rateable value: Brihanmumbai Mahanagarpalika-1999 52. Increasing Block Tariff for Domestic Use -1999 73. Uniform Water Tariff 84. Linear Water Charge (Domestic), Kerala-1999 84(a). Linear Water Charge (Non- Domestic), Kerala-1999 85. Two-Part Tariff, Hyderabad 86. Pricing Structures of Unmetered Supplies 97. Institutional Set-Up for Operating Urban Water Systems, Illustrative-2000 108. Institutional Framework for Water Provision -2000 119. Water Provision in Sampled Cities-2000 1110. Water Connection Charge, Pune -2000 1311. Water Connection Charge, Bangalore-2000 1312. Annual Water Benefit Tax, Pune 1313. Water Charge for Metered Connections, Pune 1314. Annual Water Charge for Slum Settlements, Pune 1315. Volumetric Domestic Water Tariffs, Bangalore-2000 1316. Water Charges for Domestic Use in Agra and Allahabad (Rs.)-2000 1317. Structure of Cost Incurred on Water Provision, as a Percentage of Total Cost (1995/96) 1418. Structure of Cost Incurred on Water Provision, as a Percentage of Total Cost (1999/00) 1419. Per Unit/kl Structure of Cost in Water Provision (1999/00) 1520. Water Account Recoveries 1521. Water Price – Cost Linkage 1622. Relationship between Pricing Reforms and Selected Country Characteristics 19

Boxes1. National Water Policy, 2002: An Excerpt 32. ADB’s Water Pricing Policy 43. Water Tariffs in Latin American Countries 94. What is capacity to pay for urban water? 16

Urban Water Pricing:Setting the Stage for ReformsOm Prakash Mathur, Sandeep Thakur *1The Importance of Urban Water PricingSetting appropriate prices is central to the reform of theurban water sector in India. 1 Current levels of water pricingin most Indian cities and towns are deficient in severalrespects. Firstly, the price of urban water is low in relationto the cost incurred in its provision. Although firmestimates in respect of water price and costs are vague,on an average, prices or recoveries from the sale of waterand other charges relating to water provision are approximately22 to 25 per cent lower than the operation andmaintenance costs. Recent city-specific studies of Bangalore,Chennai and Hyderabad show that the typical pricecharged for water for residential use is about Rs.1.50 percubic meter which is one-tenth of the operating and maintenancecosts actually incurred (Raghupathi and Foster,2002), raising serious concerns about the financial viabilityand sustainability of urban water utilities (World Bank,1995). Annual losses on account of operating and maintainingurban water supply systems are conservatively estimatedat Rs. 50,000 to 60,000 million, placing an enormousburden on water supplying entities. Secondly, under-pricinghas resulted in poor service and reduced incentivesto expand the spatial coverage of services. Althoughmost cities and towns have been able to reach areasonably high level of access to safe water – 90.01 percentaccording to the Census of India, 2001, only about50 percent of the urban households have “tap water withinpremises”. Access to tap water within premises is as lowas 27.1 percent in Bihar, 29.3 percent in Kerala, and 34.9percent in Tamil Nadu. Most households face limitedhours of service and water services are uniformly substandard.The cost of intermittent water supplies forhouseholds is said to be high; according to a recent paper,the average capital cost for installing pumps, waterfilters, tanks and other equipment is estimated at Rs. 2,620*The views expressed in this paper are those of the authors and do not necessarily reflect the views of GOI, UNDP, IIPA or the collaboratinginstitutions.1Water price reform is an important agenda in many developing countries. See the following quote. “The reformulation of tariffs and subsidypolicies is central to the reform of water and sanitation services in developing countries. The traditional model of service provision has coupledpublic ownership with tariffs that are set well below the cost of the service, justifying this in terms of the importance of water services for the healthstatus of the poor. However, results have often been unsatisfactory. Service quality and coverage remain inadequate in many countries, and subsidiesdirected at public water companies have often benefited the middle classes rather than the poor, who remain unconnected to the public network.Reformers have proposed to break out of this low level equilibrium through a combination of private sector1

Urban Water Pricing: Setting the Stage for Reformsper household (Rana, 2003). In Delhi, the annual cost ofreducing water supply unreliability is placed at Rs. 844per household (Zerah, 2000). The Government of Indiaand the World Bank recently reported that urban watersystems in India “deliver on average 50 to 60 percent oftheir capacity to end-users, compared with 80 to 85 percentin other countries. Poor, and sometimes non-existent,management leads to waste and inefficiency, with the resultantlarge claim on resources that could be redeployedfor service improvements”. Tariff adjustments to achievecost recovery are central to the water sector. Most watersupplying entities in India operate at a loss. They financethe shortfall between tariff revenue and costs through operatingand capital subsidies from the government andthrough depreciation of capital. The result is a low levelequilibrium characterised by low tariff, poor service andlimits on access, especially of poor households.Thirdly, the objective of large-scale subsidisation of wateron grounds of lack of affordability by the poor has notbeen achieved. Much of the evidence points out that thepoor pay more, often two-to-three times, if coping costswere included, and the price subsidy meant for them andbuilt into tariff structures, e.g., in increasing block tariff(IBT) is appropriated by the non-poor households. Subsidieson private taps are poorly targeted, as no more than30 percent of the beneficiaries are poor. Moreover, a largeproportion of urban poor households do not have privateconnections and are, therefore, unable to benefit fromwater subsidies. Such regression in the distribution of subsidieswhere the poor do not have access to subsidisedpiped water service is a common phenomenon in Indiancities and towns. Fourthly, under-pricing has affected thefinances of state governments who have either absorbedthe losses of urban water utilities or adjusted the losses byreducing the capital account support to them for capacityexpansion. Although the macroeconomic consequencesof low water prices are difficult to assess, urban waterservices could cost the state governments the equivalentof 0.3 to 0.4 percent of their gross domestic product.When water tariffs are lower than the cost of provision,there is little incentive to expand the service and fewer resourcesare allocated to water than would be optimal.Urban water services are important for economic growth,productivity and poverty reduction. The financial viabilityand sustainability of India’s water supplying entities has beenconsistently emphasised in water policies enunciated in successiveFive Year Plans. The Working Group set up toformulate the Ninth Five Year Plan for urban water proposedadoption of the principle of full cost recovery inorder to enhance the financial viability of the water sectorand full autonomy for institutions responsible for watersupply in determining water tariff and tariff policy. Itproposed that subsidies for the poorer sections should beselective, well targeted, and transparent to ensure that therewas no excessive cross-subsidisation from other sectorslike industry or commerce (Ministry of Urban Affairs andEmployment, 1996). Apart from laying emphasis on thefinancial aspects of urban water utilities and consideringthat urban water has important implications for productivityand quality of life, the Ninth Five Year Plan underlinedthe importance of universal coverage of the populationby water supply, adequacy in terms of water consumptionnorms, integration of water supply with liquidwaste management, recycling of waste water and sewageand privatisation and participation of the community inthe management of water supply systems (Planning Commission,1997). In a recent paper titled, Urban Water Supplyand Sanitation, the World Bank has made similar observations,stating that setting of water tariffs must increasinglyfocus both on economic efficiency and financial viability,without losing sight of social affordability (WorldBank, 1999). Tariff rationalisation, according to the paper,is an essential pre-requisite to the financial viability ofagencies responsible for water supply and for increasingthe financial flows into the sector.The Tenth Five Year Plan (2002-2007) has reinforced thewater sector agenda as laid out in the Ninth Plan. While anassessment of issues relating to urban water supply is discussedelsewhere, it is important to reproduce the followingquote from the Tenth Plan that sums up the wateragenda: “the unfinished tasks in water supply in urban areasmay be summed up as augmentation to reach the prescribednorms, higher degree of reliability, assurance ofwater quality, a high standard of operation and manage-2

The Importance of Urban Water Pricingment, accountability to customers and in particular specialarrangements to meet the needs of the urban poorand the levy and recovery of user charges to finance themaintenance functions as well as facilitate further investmentin the sector. The achievement of these tasks dependsto a large extent on the willingness of the stategovernments and ULBs (urban local bodies) to restructurewater supply organisations, levy reasonable waterrates, take up reforms in billing, accounting and collection;and become creditworthy in order to have access tomarket funding” (Planning Commission 2002). It furtherobserves that the “reforms (in the water sector) relate tomaking the sector more professionally managed, withadequate autonomy and financial powers, and levy ofuser charges preferably determined by an independent regulatoryauthority. By the end of the Tenth Plan, the targetwould be to recover full operations and maintenance coststhrough the levy of user charges” (ibid.). Financialsustainability has been emphasised in the Government ofIndia’s National Water Policy, as seen in the quote (Box 1).This study on ‘Urban Water Pricing: Setting the Stage forReforms’ is in response to the need to further advancethe above-stated agenda. The present position where thewater supplying entities—be these the parastatalorganisations or the municipal governments – run intolosses by selling water below cost and where their losseshave to be either written off or adjusted against futuregrants or absorbed by the states or merely allowed to bekept on the books, is unsustainable. Under-pricing ofurban water, has not only affected the financial health ofwater supply undertakings, but also resulted in wastefulusage of water and as referred to earlier, impeded theexpansion of water services and reduced the coverageof urban poor households.Although the need for getting the prices right appears obviousand compelling, what is, in fact, an appropriate chargeis neither straightforward nor easy to determine. Literaturesuggests at least three sets of pricing mechanisms:i) long-run marginal cost,ii) short-run marginal cost, andiii) average costs.Box 1 National Water Policy, 2002: An ExcerptBesides creating additional water resources facilitiesfor various uses, adequate emphasis needs to begiven to the physical and financial feasibility ofexisting facilities. There is, therefore, a need to ensurethat the water charges for various users should befixed in such a way that they cover at least theoperation and maintenance charges of providing theservice initially and a part of the capital costsubsequently. These rates should be linked directlyto the quality of service provided. The subsidy onwater rates to the disadvantaged and poorer sectionsof the society should be well targeted and transparent.Source: National Water Policy, 2002, The Government of IndiaWhile in themselves they are unassailable, they do not helpa water supplying entity to determine an appropriate chargefor water, which requires addressing a host of questions:what costs are incurred in water provision? What is thenature of these costs? What are the different ways in whichcosts can be recovered? What instruments can be used?Who should pay for the lost water?The agenda of appropriate urban water pricing as enunciatedin successive Five Year Plans and other initiatives require thatthe following issues be specifically examined and analysed:i) Instruments of water charging: In what alternative waysis urban water charged and to what extent do theseinstruments meet the contemporary principles of watercharging?ii) Existing pricing structures: What pricing structures arecurrently in use? What objectives and principles underliethem? What are these based on?iii) Price-cost linkages: What part of the cost is recoveredby prices? What is the impact of non-revenue waterand implicit subsidies on cost recovery?These issues are examined in this paper, using the datadrawn from Bangalore, Vadodara, Allahabad and Agra,as also data from other ongoing studies on the financialstructures of municipalities and city-specificparastatal agencies responsible for water provision. Itlays out a framework for pricing reforms in the watersector. It emphasises the need to gather informationabout the structure of supply costs and consumer preferences.By understanding the latter, it is expected that3

Urban Water Pricing: Setting the Stage for ReformsBox 2: ADB’s Water Pricing PolicyConservation of water and its sustainable use areincreasingly critical factors in managing a scarceresource. Governments and civil society need to seewater as an economic good. Financial incentives foroptimising water use will be strengthened through amix of water charges, market-based instruments andpenalties. Public awareness programs will reinforce theincentives, which include water use rights, licenses andcharges, tradable permits, effluent charges, watertreatment fees, access fees, environmental liabilitiesand tax incentives. Managing water demand is afunction of efficient pricing, effective regulation andappropriate reduction and awareness. ADB will promotetariff reforms through its water-related projects andprogrammes to modify structures and rates so that theyreward conservation and penalise waste.ADB will consistently advise governments of the needto adopt cost recovery principles in their water policiesand strategies. The expansion of access to water andthe improved provision of water services require thatcapital costs be funded mainly from within the sectorby accessing the debt market and developingappropriate tariff structures. Consumers will be expectedto meet the full operation and maintenance costs ofwater facilities and service provision in urban and ruralwater supply and sanitation schemes subject to subsidyconsiderations. ADB will also promote the inclusion ofenvironmental externalities and the recovery ofresources management cost in Tariff systems adoptedby DMCs.Subsidies are a controversial issue in the water sector.ADB will support subsidies for water services in thefollowing circumstances: (i) where treated water useshave beneficial external effects in preventing healthproblems, (ii) where the transaction costs of measuringusage are very high and (iii) where a limited quantityof treated water for the poor is regarded as a basichuman need.Source: Water for All, The Water Policy of the Asian Development Bank, 2001water utility companies will be able to offer price and serviceoptions to consumers that are more efficient than theexisting system.Section 2 presents the key instruments of urban water chargingand water pricing structures. Section 3 analyses theexperiences with urban water pricing in four cities andsupplements this with other examples. This section examinesthe structure of costs in supplying water and the differentwater charging instruments and the outcomes in termsof revenues and expenditures, in particular. Section 4 providesa framework for urban water charging together witha brief explanation of objectives that water pricing mustaim to achieve.4

Natural Resource2Urban Water Pricing: Instruments andMethodsInstruments of Urban WaterChargingThree types of instruments are generally used when chargingfor water. The first is a connection fee or a fixed accesscharge. Such a fee is levied to provide the user with aconnection to a municipal (public) water supply system. Aconnection fee or charge is based on the size of the plot orholding or the size of the connection and ferrule or a combinationof plot size and the size of the ferrule. It is unclearif the connection fee is designed to contain an elementof the capital cost that is involved in laying out thedistribution network.The second is a water tax, for which provision exists inmost municipal legislations. It is a tax which is unrelated towater use or consumption. It forms a part of propertytaxation and is leviable on the annual rateable value of landand property and is meant to essentially serve as a generaltax. Conditions under which a water tax may be levied areprescribed in municipal legislations, which, among others,include categories of water users who may be exemptedfrom the payment of water taxes, a ceiling on the rate atwhich water tax may be levied and the use to whichreceipts from such a levy may be applied. For example,the Uttar Pradesh Municipalities Act laysdown that a water tax may not be levied on propertieswhich have an annual value of less than Rs.300; the Uttar Pradesh Municipal Corporation Act,1959 lays down that the proceeds of water tax (and drainageand conservancy taxes) may be pooled and used forpurposes connected with the construction, maintenance,extension and improvement of the service. TheMaharashtra Municipal Act 1965 provides for a generalwater tax as a part of the consolidated tax on propertyand a special water tax for water supplied by the municipalcouncil. It further lays down that a municipal council,instead of imposing a special water tax, may fix rates forthe supply of water by measurement. The Bombay MunicipalCorporation Act provides for a water tax if thepremises are not charged for water by measurement; anda water benefit tax, which is in addition to water tax orwater charges on all residential properties in GreaterBombay. Water tax and water benefit tax are applied tothe annual rateable value of premises, with the tax ratedifferentiating between residential and non-residential properties(Table 1).A third method of charging is a water charge. Conceptuallydesigned as a charge on consumption, it is a ubiquitousinstrument for charging both metered and unmetered watersupplies. Besides a connection fee, a water tax and a waterTable 1: Water Tax on Annual Rateable Value:Brihanmumbai Mahanagarpalika - 1999Nature of premises Water tax rate (%) Water benefit (%)Residential 20 10Non-residential 45 20Source: Government of Maharashtra5

Urban Water Pricing: Setting the Stage for Reformscharge, there are minor instruments such as a meter rent, alicense fee, a water cess, a meter maintenance charge wheremeters are provided by the water supplying agency, developmentcharges, 2 and fixed charges for the capital renovation3 of the water system, which are used for operatingwater supply systems. Many of the instruments yield littlerevenue, raising questions about the purpose for which theyare being kept on statutes or rules.Water Pricing StructuresMarginal cost pricing is an indispensable aspect of waterpricing rules (American Water Works Association, 1991).A basic premise for the creation of autonomous waterboards, for instance, was that they will be able to set tariffequal to the marginal cost of providing services to eachcategory of consumers. However, few water-supplyingentities have control over price fixation. Further, implementingthe principle of marginal cost pricing for waterhas proved to be difficult on account of the problems inusing historical accounting data, estimating external costs,apportioning joint costs and addressing equity-related concerns.These problems have impeded the use of marginalcost pricing by water agencies. The American Water WorksAssociation contends in this regard that, “the applicationof the theory of marginal cost pricing to water rates lackconsiderable practicality”. Prices are efficient if they areset equal to the long-run marginal cost of water provision.Water pricing structures in India are extremely complexand often clumsy. At one level, price structures distinguishbetween metered connections and unmetered connectionsas also bulk provision and non-bulk, discrete provision.At another level, price discrimination is common with (i)categories of water users, which comprise not only theprincipal categories of domestic users and non-domesticusers, but also the assorted categories consisting of wateruse for washing motor vehicles, cattle sheds, stables andthe like and (ii) income groups of households, the assumptionbeing that low-income households use lower quantitiesof water and high-income households have higherconsumption levels. Water pricing may differ with thequality of water supply, e.g., filtered, unfiltered, tube-wellsupplies, etc. Cross-subsidy is central to the principle ofprice discrimination. As will be seen later, non-domesticusers subsidise the domestic sector. High-income householdsusing larger quantities of water subsidise low-incomehouseholds, raising questions about the desirability of overloadingcertain categories of water users.Water pricing structures are either volumetric or non-volumetric.Volumetric structures rely in one way or anotheron the volume (quantity) of water and are used only underconditions of metered supplies of water. Non-volumetricstructures are applied to other measures that are proxiesto water consumption.A tariff structure is a set of procedural rules that determinethe service conditions and charges for various categoriesof water users. As stated earlier, charges for waterare based on two components: the volume of water consumedand a set of factors other than water use. Conceptually,it is possible to use one of the two components:thus, water can be charged on the basis of the value ofproperty (water tax) rather than on the level of consumption.Alternatively, water can be charged on the basis ofwater use multiplied by the unit price. A variant, whichis more common, is to use a mix of the two, i.e., afixed monthly charge and a charge based on consumption.Several types of water tariff are in use in Indian citiesand towns. Increasing block tariff (IBT): An increasing blocktariff is a series of prices that increase in steps as consumptionrises. The key feature of IBT is that it contributesto equity by allowing low-income households to paylower rates for water than other households. An IBT structureis based on the volumetric component. A water userin a particular category, such as residential, is charged arelatively low price per unit for consumption up to a specificamount. This amount defines the size of the initialblock. A user whose consumption exceeds the size of the2Development charges are meant to cover the cost of water and sewer lines, and are payable by plot holders. See the Schedule of Rates of the DelhiJal Board.3Fixed charges for capital valuation are a feature of the water charging system in Rajasthan. See the Notification of the Public Health EngineeringDepartment, dated 28 th May 1998.6

Urban Water Pricing: Instruments and Methodsinitial block faces a higher price per unitfor the additional consumption until he exhauststhe second block and then a still higherprice until he reaches the top block in theincreasing block structure. 4To construct an increasing block tariff, threeparameters are needed: (i) the number ofblocks, (ii) size of the block in terms of waterand (iii) the price per unit in each block.The case for IBT is argued on several grounds.First, IBT provides equity, as high-income households tendto subsidise the water usage of low-income households.Consumption levels of water among high income householdsis greater and because a greater percentage of theirwater use occurs in the higher blocks, they pay a higher averageprice for water. Second, IBT can promote water conservationand sustainable water use. This is because the pricein the higher blocks is at high rates and discourages wastefulwater use. Third, an IBT is needed to implement marginalcost principles. It is argued in this regard that because marginalcosts are expected to rise with total water use, pricesshould rise accordingly with individual household use. Thishas been the main justification for multi-block structures.Thus, for an increasing and decreasing block tariff structure,a water bill could be calculated as under:LetQ* = amount of water sold to a specific consumer.Q 1= maximum amount of water that can be sold inthe first block at price P 1Q 2= maximum amount of water that can be sold inthe second block at P 2Q 3= maximum amount of water that can be sold inthe third block at P 3If Q*

Urban Water Pricing: Setting the Stage for ReformsTable 3: Uniform Water TariffCity Uniform (Rs./kl) tariffDomestic IndustryKanpur 2.0 10.0Indore 2.0 22.0Surat 2.0 8.0Madurai 5.0 20.0Source: NIPFP, Field WorkTable 4: Linear Water Charge(Domestic), Kerala-1999Connection/kl Charge includingmeter inspectioncharge (Rs.)10 2211 2512 2813 3125 6750 182100 550Source: NIPFP, Field WorkTable 4(a): Linear Water Charge(Non- Domestic), Kerala-1999Connection/kl Charge includingmeter inspectioncharge (Rs.)10 10214 10516 12020 14925 18750 370100 900Source: NIPFP, Field WorkTable 5: Two-Part Tariff,HyderabadPart Rs.Part 1Minimum/month 55.0Part 2500 kl 14.00//klSource: NIPFP, Field Workuniform tariff is commonly used in such cities as Kanpur, Indore, Surat andMadurai (Table 3). The main merit of uniform tariff lies in its simplicity. At thesame time, it provides no incentive to consumers to effect savings on water useand may in fact, violate the principle of water conservation.Linear watercharge: This is a charge, which rises with consumption, notin blocks, as is the case with IBTs, but with every discrete unit of waterconsumption. Tables 4 and 4a illustrate this for Kerala. Thus, a consumerin Kerala is required to pay a monthly charge of Rs. 22 for consumptionnot exceeding 10 kl, the charge increases to Rs. 25 for a connection levelof 11 kl, and rises in tandem, until it reaches 100 kl for which the chargeis Rs. 550.Two-parttariff: A two-part tariff with a minimum charge for a fixedquantity of water beyond which the charge may either follow an IBTstructure or a uniform tariff. Conceptually, a minimum charge is in thenature of a rent payable by all users having a water connection, whetheror not water is used (Table 5). The minimum charges are so fixed thatthey are lower than the tariff rate laid down for the initial block, givingthe advantage of a lower tariff to low water consuming households (SeeBox in Annexure).Tariff for unmetered supplies: Price structures commonly used forunmetered supplies are either annual fixed charges as shown in Table 6,or charges that vary with the size of the water connection. Separatepricing structures are applied to standpoint connections where such chargesare provided for under the rules.The above example demonstrates the complex nature of water pricestructures in Indian cities and towns. Variations are far too large to be ableto test their adequacy with respect to the objectives that underlie designingpricing systems and structures. Most pricing systems, particularly thosewhere water is a municipal responsibility, are historically driven with littlechange having been effected in their format and structure. A typical exampleis of the Kolkata Municipal Corporation where users have beendivided into 49 categories for the levy of a connection fee. These categoriescomprise, among others, stables, cooling plants, flushing purposes inthe market areas, fire fighting, medical practitioners, film actors and painters,owners of newspapers, estate agents, race horse jockey, persons engagedin the profession of loading and unloading and others. In recentyears, attempts have been made to simplify the pricing structures and toperiodically adjust them in line with costs. In Bangalore, tariffs have beenrevised six times between 1999-2000; the Bangalore Water Supply andSewerage Board is endowed with powers to adjust the tariff if it is warrantedon account of an increase in power tariff rates; for the adjustment8

Urban Water Pricing: Instruments and Methodsof tariff on account ofother factors like salary increaseor additional maintenancecosts, thegovernment’s approval isessential. The Chennai MetropolitanWater Supply andSewerage Board has alsotaken steps to simplify thetariff system. Many progressivemunicipal corporations,like Mumbai, havealso adjusted the tariffstructure in order to meetthe rising cost of water provision,although it retainsthe historically complexpricing regime.Table 6: Pricing Structures of Unmetered SuppliesCity Annual flat rate (Rs./year) Annual ferrule based pricesDomestic Industrial Ferrule size Domestic Non-domestic/industrialVijayawada 480 -Surat - - ½” 1201” 6481½” 1,296Belgaum - - 1” 1,155 10,375Gwalior 720 1,440Nagpur ½” 300 1,200¾” 600 2,400Patiala 20** 60*Kanpur*** ½” 360-1200Gorakhpur ¾” 540-1800Note: Town in Punjab ££ 50-100* Per tap.** For the first tap; for the second and subsequent taps the rate declines.*** In Kanpur, the annual tariff depends on (a) ferrule and (b) annual rateable value.Source: NIPFP, Field WorkBox 3: Water Tariffs in Latin American Countries• There was a fixed minimum volume, which is chargedfor regardless of whether it is consumed. This is 15m 3 in most places; in Panama it is 30 m 3 for residentialconsumers and lower amounts for low-income areas.• The marginal per-meter charge for consumption abovethe minimum is a progressive function of the total volumeconsumed. In El Salvador there were three ranges; inNicaragua there were nine; in Panama five, and inVenezuela four. The degree of progressiveness relatedto volume varies considerably from place to place.• There are regional variations, which aim to capturedifferences in costs and/or in social conditions. Thesenormally specify a higher tariff for the metropolitansystem. In Venezuela there were seven “types” oftariff; in El Salvador there were two (metropolitan andother); in Nicaragua there were two geographicaldistinctions within the capital city according to thedistance from an historically important source andthe regions paid less than the capital; in Panamathere were four regional or spatial variants in thetariff.• There was normally a special tariff for “social” cases.Sometimes this only applies to standpipes (ElSalvador); in other cases it applies generally toinformal settlements (Managua, Panama,Venezuela).• In all these systems, the coverage of micrometering is relatively low; in some of them, it issimply non-existent. In such conditions, the watercompany’s discretionary estimates of each user’swater consumption are crucial to tariff setting. Thisdiscretion is often used with the intention of trimmingthe bill to what the company thinks each part ofthe market will bear.Source: Ian Walker, ibid9

Urban Water Pricing: Setting the Stage for Reforms3Water Pricing Experiences:A Four-City SurveyveyInstitution Example Spatial JurisdictionPublic Health Rajasthan, Punjab, State-wideEngineeringHaryanaDepartment (PHED)State-level Kerala, Delhi State-wide UTparastatal agency (excluding NDMC)Metropolitan agency Bangalore, Chennai, Metropolitan-wideHyderabadCity-level Uttar Pradesh Lucknow, Varanasi, etcspecialized agencies Jal Sansthans.Municipal Corporations Gujarat, Maharashtra Mumbai, Ahmedabad, etc.10Table 7: Institutional Set-Up for Operating Urban Water Systems,Illustrative - 2000Municipalities (small)Source: NIPFP, Field workAndhra Pradesh,Uttar Pradesh, Tamil NaduUrban water in India is a state subject; the centralgovernment’s responsibility in respect of water is definedin the River Board Act, 1956 and Inter-State Water DisputesAct, 1956 and is limited to the regulation and developmentof inter-state rivers and river basins and the provisionof support for programmes such as the acceleratedurban water supply, low cost sanitation and establishmentof water monitoring systems. The functions in respect ofthis sector stand allocated to the Public Health EngineeringDepartment (PHED), e.g., in Rajasthan; a state-level agencywith state-wide jurisdiction like the Kerala Water Authorityand Delhi Jal Board; state-level parastatals such as those inKarnataka and Uttar Pradesh (Karnataka Water Supply andSewerage Board and Uttar Pradesh Jal Nigam), metropolitan-levelagencies like in Bangalore, Chennai and Hyderabadand municipal corporations and municipalities in such statesas Gujarat, Madhya Pradesh and Maharashtra. It is not uncommonto find the existence of arrangements wherein capitalworks are dealt with by a state-level agency (PHED), andthe operation and maintenance of water supply systems conductedby a city-level agency or municipality (Table 7).Participation of the formal private sector (excluding the productionof bottled water) in urban water provision and managementis negligible, although several cities in India have witnessedthe emergence of small-scale water providers. Smallscaleproviders are engaged in providing water to slum andsquatter settlements that are not served by public supplies.The sample cities namely Agra,Allahabad, Bangalore, Pune,and Vadodara display the samediverse arrangements; the municipalcorporations are responsiblefor the provision of waterin Pune and Vadodara, whilethe Uttar Pradesh Jal Sansthandischarges this function in Agraand Allahabad. A Water Supplyand Sewerage Board providesand maintains the watersupply system in Bangalore andis responsible for the capitalexpansion of the system.

Water Pricing Experiences: A Four-City SurveyWater provision comprises (i) capital improvement work andasset creation, (ii) operations and maintenance and (iii) billing,levy and collection of water charges. Capital improvementworks include source development, installation of plants andpumping stations and laying of distribution networks and thelike. Operations and maintenance functions relate to runningand maintaining the system and ensuring proper distributionof water. Minor capital works include repairs to the system,which also form a part of the operations and maintenanceexpenditure. Levy and collection of charges for providingaccess to, and selling, water constitute an important responsibilityof water supplying entities.Pune and Vadodara Municipal Corporations and the BangaloreWater Supply and Sewerage Board hold responsibilityfor all functions relating to the provision of water.On the other hand, the Agra and Allahabad Jal Sansthansare responsible for the operations and billing and collectionof charges, while the responsibility for capital worksrests with the Uttar Pradesh Jal Nigam (Table 8).Water Provision: Key FeaturesThe sources of water supply to the sample cities compriserivers in the case of Agra and Allahabad which draw waterfrom the river Yamuna. Allahabad also draws waterfrom nearly 130 tube wells, dams, and bore wells. Agraand Allahabad do not have any assessment of water demand;demand is assumed to be co-terminus with the quantityof water that is released from the system. The BangaloreWater Supply and Sewerage Board (BWSSB) is ableto supply around 90 percent of the water demand andVadodara Municipal Corporation is also reported to bemeeting 98 percent of the city’s water requirements. Bangaloreis supplied with water fromthe Cauvery river, Arkavatty-T.G.Halli and Hessaraghatta rivers witha capacity of 540 million litres perday (mld), 140 mld and 25 mld respectively.Pune also has threesources namely, Khadkwasaladam, Pavana dam, and Pashan lakeAgraAllahabadBangaloreTable 8: Institutional Framework forWater Provision - 2000PuneVadodaraSource: City-level SurveyUttar Pradesh Jal Sansthan/Jal NigamUttar Pradesh Jal Sansthan/Jal NigamBangalore Water Supply andSewerage BoardPune Municipal CorporationVadodara Municipal Corporationeach with a capacity of 160 mgd, 5 mgd, and 5 mgd respectively.The absence of data on effective water demandand its sensitivity to price change remains an importanthandicap in formulating an appropriate water pricing policy.Other aspects of water supply relate to the installed capacity,water released, volume of water charged and distributionlosses. It is common to observe differences betweenwater released and installed capacity (few cities wouldrelease the entire volume of water held in the system) onthe one hand and between water charged and water released,on the other hand, the former usually being lessthan the water released on account of firstly, free waterthat many cities provide and secondly, distributional losses.In recent years, the quantity of non-revenue water has risenenormously. 6 Key statistics in respect to these features aregiven in Table 9.The survey results show that the distributional losses are,on average, 30 percent, which are roughly twice the normsand standards. Free water supplied via public standpostsaccounts for 15 percent in Agra and 28 percent in Allahabad,whereas in Bangalore, the city corporation buys water fromthe Bangalore Water Supply and Sewerage Board (BWSSB)Table 9: Water Provision in Sampled Cities - 2000Features Agra Allahabad Bangalore PuneInstalled capacity (mld) 280 230 705 790Water released (mld) 250(89%) 210(91%) 645(91%) NADistributional losses (mld) 75(30%) 63(30%) 213(33%) 176(22%)Free water (mld) 37.5(15%) 58.8(28%) NA NAWater charged 137.5(55%) 117.6(56%) 432(67%) 517(65%)Source: City-level survey6Non-revenue water comprises free water, distributional losses and unaccounted for water, a euphemism for water that is drawn illegally.CityInstitution11

Urban Water Pricing: Setting the Stage for Reformsfor free distribution among urban poor communities. Thewater charge ranges from a low of 55 percent in Agra and56 percent in Allahabad to a high of 65 percent in Bangaloreand 67 percent in Pune. These facts, as we show later,have an important bearing on the financial viability of watersupplying entities.Metered versus unmetered water supplies are another importantaspect that have an impact on the pricing structuresand consequently upon the overall financial health of watersupplying organisations. In Agra, of the 110,000 connections,80 percent are reported to be non-functional with theresult that water billing is done on the basis of a minimumannual charge. This is a peculiar characteristic of domesticmeters; non-domestic meters are reported to be functionalwhere it has been possible to bill on the basis of water consumed.7 However, in view of the fact that domestic suppliesaccount for 80 percent of the total water consumptionin Agra, which carries a fixed annual charge, stagnation isobserved in the revenues earned from water sales.The position in Allahabad is similar to that in Agra: of the86,000 water connections only about 55 percent are metered,and of these, 90 percent of the metered connectionsare not in working condition. In other words, five tosix percent of the households in Allahabad have workingmetered connections and pay according to the tariff fixedfor them. In Pune, properties connected to metered connectionsaccount for 41 percent of the total number ofproperties and properties with unmetered connections accountfor 27.7 percent. A noteworthy feature of the PuneMunicipal Corporation lies in water connections amongslum households.Charging InstrumentsAs indicated earlier, there are different ways in which wateris charged for. In Agra and Allahabad, five instrumentsare used for charging water: a water tax using the annualrateable value (ARV) as the base; water charge on all meteredand unmetered water connections; meter rent onmetered water connections; development charge/fee forconnections, which is akin to a connection charge; and serviceand supervision charges on all connections. Standpostsare not charged for in Agra and Allahabad. An importantfeature of the charging system in Agra and Allahabad isthat the charges discriminate between different categoriesof consumers: thus, the charges vary between domesticconsumers and non-domestic consumers, with non-domesticconsumers being further categorised into specialindustry categories (Rs. 15/kl), business (Rs. 7.5/kl), governmentand semi-government institutions (Rs. 6.0/kl),Army Cantonment Board (Rs. 4.5 kl), and municipal works(Rs. 3.0/kl). 8 The charge for special industry is five timesthat of water for domestic users. Rate structures are givenin Tables 10 to 16. Pricing policies usually do not distinguishbetween access and usage. Subsidies are generally onthe price of water, but the access charge (at least in somecities) tends to be high as this is linked to possession ofbuilt-up space. As a result, the subsidies are perverse andanti-poor.The BWSSB charges a connection fee, which is higher forupper floors in comparison with the ground floor and alsowhere the domestic users pay a lower fee as compared withthe non-domestic users. Domestic consumers in high-rise apartmentbuildings and government institutions are charged atbulk rates and others according to rates for different slabsand meter hire charges. In Pune, where water provision is theresponsibility of the Pune Municipal Corporation, water charginginstruments comprise a water connection charge, a watertax, a water benefit tax, volumetric water charge and fixedcharges for new unmetered connections in slum settlements.Thus, water is charged for in different ways, consisting of (i) aone-time charge, invariably for a connection, (ii) an annualcharge or a tax, often leviable on the annual rateable value(ARV), and also a meter rent, generally leviable once a year;and (iii) a water consumption charge collected on a monthly,bi-monthly or an annual basis. A water charge from anunmetered household is more in the nature of a fee, ratherthan a charge and promotes inefficient consumer behaviour.7It appears that the low tariff is a disincentive to keeping the meters in working condition. The government requires that water be supplied evenwhen meters are not in working condition.8Figures in parenthesis are the per kl charge for each category in Agra.12

Water Pricing Experiences: A Four-City SurveyTable 10: Water Connection Charge,Pune - 2000Diameter of the pipe Charges (Rs.)(in inches)0.50 5000.75 1,0001.00 2,5001-2.00 5,0002-3.00 7,5003-4.00 10,000Source: City-level surveyTable 11: Water Connection Charge,Bangalore - 2000TypeFee (Rs.)Domestic (ground floor) Rs. 1,620Domestic (ground and first floors) Rs. 2,220Domestic (ground and two floors) Rs. 2,820 + pro ratacharges @Rs.70/sq.meterNon-domesticRs. 1,050 + pro ratacharges@Rs.120/sq.meterSource: City-level surveyTable 12: Annual Water Benefit Tax,Pune (Rs.)Basic 1997 2000Annual rateable value 2% 2%Source: City-level surveyTable 13: Water Charge for MeteredConnections, PuneType 1997 2000Domestic 2.00 2.50Non-domestic 10.00 16.00Source: City-level surveyTable 14: Annual Water Chargefor Slum Settlements, PuneYearRs.1997 175.02000 250.0Source: City-level surveyTable 15: Volumetric Domestic Water Tariffs,Bangalore - 2000ConsumptionTariff Rs./kl*slab (kl)100 30.00* A minimum payment of Rs.75/month. The same rate applies to apartments ina high-rise building.Source: City-level surveyTable 16: Water Charges for Domestic Use in Agra and Allahabad - 2000 (Rs.)Annual Size of meter connectionrateablevalue 15 mm 20 mm 25 mmAgra Allahabad Agra Allahabad Agra Allahabad5000 1800 1680 2700 1800 3600 2400Source: City-level survey13

Urban Water Pricing: Setting the Stage for ReformsStructure of CostWater provision includes the production and distributionof water. Costs comprise establishment cost, which includessalaries and wages; electricity charges; chemicals forthe treatment of water; general repairs and maintenanceof plant and machinery; cost of raw water where applicable;and interest payments. For the reason that water isdrawn from different sources and distances, the structureof costs varies between different cities, often even widely.We give below the structure of costs for five sample cities.The data in Tables 17 and 18 show great heterogeneity inthe structure of the cost of water provision, which mayStructure Agra Allahabad Bangalore Pune VadodaraEstablishment 50.2 65.7 17.7 22.1 18.0Electricity 18.8 4.0 56.9 44.6 20.4Chemicals 13.7 10.4 - 2.2 -General repairs 4.3 8.5 7.8 10.0 29.8Raw water - - - 16.4 -Interest payments - - 17.6 4.6 31.4Others 13.1 11.3 - - 0.4Total 100.0 100.0 100.0 100.0 100.0Source: City-level survey14Table 17: Structure of Cost Incurred on Water Provision,as a Percentage of Total Cost (1995/96)Table 18: Structure of Cost Incurred on Water Provision,as a Percentage of Total Cost (1999/00)Structure Agra Allahabad Bangalore Pune VadodaraEstablishment 48.6 78.7 20.1 19.0 24.2Electricity 14.8 1.2 59.5 47.8 48.5Chemicals 19.5 4.5 - 1.9 -General repairs 2.3 9.6 7.8 8.8 13.9Raw water - - - 16.3 -Interest payments - - 12.8 6.2 13.3Others 14.9 6.1 - - 0.1Total 100.0 100.0 100.0 100.0 100.0Source: City-level surveyreflect the joint effect of local factors such as geographyand system and operational inefficiencies. In Agra andAllahabad, establishment costs account for anywhere between50 to 70 percent of the total cost; the same, however,is only about 17 to 20 percent in Bangalore, Pune,and Vadodara. 9 Electricity costs are a major cost in Bangalore,Pune and Vadodara and negligible in Allahabad.Electricity has become an important component of costin the production and distribution of water. Energy costsare particularly high in Bangalore on account of distanceof sources and energy is spent on abstraction, diversionand transport. Also, electricity costs are exogenous to thewater supplying entities. 10 Energy costs reflect the three dimensionalarrangements of watersources, reservoirs and treatmentplants in a given topographyand abstraction and recharge.Per unit costs (kl) of water productionand distribution vary betweena low of Rs. 3.22 in Pune,Rs. 2.67 in Allahabad, and Rs. 3.69in Agra, and a high of Rs. 12.98in Bangalore (Table 19). The perunit costs for Agra and Allahabadare inclusive of unpaid electricitycharges. Of these, as shownearlier, electricity is the principalcost item in Bangalore andPune, and establishment themain cost item in Agra andAllahabad. Most costs on a unitbasis have risen over time, withthe rates of rise in electricitycosts being greater compared toother cost items.The instruments of watercharges and charging methodshave been stated above. The9Data on the quantity of electricity used for water production and distribution are not known. In France, with centralised treatment and distributionconsumption of energy, per cubic metre is 0.5 to 0.6 kw.10Low component of electricity charges in Agra and Allahabad may be explained, in part, by non-payment of electricity charges by the twocorporations, and in part, by easy access to water from river sources like Yamuna.

Water Pricing Experiences: A Four-City Surveywater supplying entities recover the cost incurred on waterprovision in different ways including a connection charge,water tax, fees, charges etc. The recoveries in the case ofthe sampled cities are shown in Table 20.Per unit/kl recoveries from the sale of water are Rs. 3.1 inAgra, Rs. 2.28 in Allahabad, Rs. 13.79 in Bangalore and Rs.2.40 in Pune. Over the four-year period, per unit recoverieshave risen at an annual rate ranging from 9.9 percent inPune, to 13.5 percent in Bangalore, and 18.1 and 14.5 percentin Allahabad and Agra respectively. An importantpoint to note is that the recovery from water sales has risenat a faster rate over the 1995/1996 to 1999/2000 periodcompared to expenditure on water provision, perhaps signallingthat price adjustments have found acceptance as anecessary tool for achieving financial viability among watersupplying entities.The price of water as manifest in recoveries, however,does not cover the cost incurred in water provision in Agra,Pune and Vadodara. Price is ableto cover 97.9 percent, 48.3 percentand 74.4 percent of the costrespectively in Agra, Vadodaraand Pune (Table 21). On a percapita basis, annual losses are Rs.2.69 in Agra, Rs. 64.50 in Puneand Rs. 121.10 in Vadodara. Althoughthe losses have declined,the position is still unsustainable.A few concluding observationsare offered at this stage.• Urban water is charged forin many ways – a connectioncharge is a one-timeTable 20: Water Account RecoveriesRecoveries (1995/96) per unit/kl, Rs. (1999/00) per unit/kl, Rs.Agra Allahabad Bangalore Pune Agra Allahabad Bangalore PuneSale of water 1.61 0.94 7.75 1.56 2.94 1.90 13.29 2.27Other receipts 0.13 0.17 0.30 0.05 0.16 0.38 0.59 0.12Total 1.74 1.11 8.04 1.61 3.10 2.28 13.79 2.40Source: City-level surveylevy; a tax and other rents like meter rents are payableannually, while other consumption charges are eitherpaid every month or at a pre-determined time. Forthis reason, the accounting of revenues of water supplyingentities assumes a complex character, particularlywhen the life of the water system is unstated orunspecified.• On the cost structure, fixed costs are shown in theform of interest payments or debt charges for thosecases where a water supply system has been upgradedor augmented. Thus, in Agra and Allahabad, whichhave not added any new capacity, these do not form aconstituent of the cost. Further, a perusal of the coststructure shows that, on the one hand, there are nondiscretionaryexpenditures in the form of salary paymentsand interest and debt charges and on the otherhand, there are electricity charges that are determinedexogenously.Table 19: Per Unit/kl Structure of Cost in Water Provision (1999/00) (Rs.)Structure Agra Allahabad Bangalore PuneEstablishment 1.54 1.66 2.61 0.61Electricity 0.47 0.03 7.72 1.54Chemicals 0.62 0.10 - 0.06General repairs 0.07 0.20 0.99 0.28Raw water - - - 0.53Interest payments - - 1.66 0.20Others 0.47 0.13 - -Subtotal 3.17 2.11 12.98 3.22Total (including outstandingelectricity charges) 3.69 2.67 12.98 3.22Water installed capacity (mld) 280 230 705 790Source: City-level survey15

Urban Water Pricing: Setting the Stage for ReformsTable 21: Water Price – Cost Linkage (expressed in per capita Rs. terms)Cities Recoveries from Cost incurred on water Recoveries as a % ofsale of water provision water provision1995/96 1999/00 1995/96 1999/00 1995/96 1999/00Agra 65.98 128.46 84.02 131.15 78.53 97.94Allahabad 52.75 101.45 63.11 93.91 83.59 108.03Bangalore 349.58 537.11 387.07 505.35 90.32 106.29Pune 146.40 187.63 158.24 252.15 92.52 74.41Vadodara 61.63 112.90 187.00 233.91 32.95 48.26Note: Unpaid dues for electricity not included in costs.Source: City-level survey• With the exception of Bangalore, where tariff revisionshave led to a marginal surplus, other water supplyingentities run into losses with the usual consequencesfor service delivery, expansion of water networksand the like. It means that the most basic requirementof any water tariff, i.e., to raise enough revenuesto cover the cost of service provision, is notmet in most Indian cities. Also, since most householdsin cities which use an IBT fall into the first or secondblock, they end up receiving large subsidies for water.• A high proportion of non-revenue water is a commonfeature in Indian cities and towns. It should beevident that as long as it cannot be brought down,non-revenue water will impede any attempt torationalise water tariff structures.Box 4: What is capacity to pay for urban water?A household in France spends approximately 1.4percent of annual income or five days of annual incomeon water. It is nearly one euro/day for a consumptionlevel of 120 m 3 /year or 10 m 3 /month.In India, below an income level of Rs.2,000/month, thepercentage of income for water expenses would besignificantly higher than in the developed countries. InRajkot, on the basis of an average monthly income ofRs.5,000, the costs are approximately four percent ofthe income, with an average consumption of 65 lpcd.In Vijaywada, the water budget is 5.2 percent and theaverage consumption is 100 lpcd.Source: Alain L Dangeard, Dematedee, mimeo, undated.16

4Water Pricing:Setting the Stage For ReformsA Framework for ReformsPricing of urban water as also other urban infrastructureservices is a key failing in India. Apart from their legendaryinadequacy, both in quality and quantity, the prices that arecharged for the services constitute a relatively small proportionof the long–run marginal costs, 11 even when itsadverse consequences are widely recognised. First, the institutionsresponsible for the provision of such servicesdo not receive enough revenues to improve and maintainthem adequately; resulting in poor service for those servedand reduced incentives to extend water to additional population.Second, cheaper services encourage those with easyaccess to use them excessively. Third, such policies adverselyaffect distribution, as low–income and poor householdspay a higher price than higher income households.Financial viability and tariff setting are linked throughoutthe country’s water sector. The current approach to tariffsetting has resulted in tariff levels often being far belowthe basic operation and maintenance levels, let alone fullcost recovery. Tariff reforms are also constrained by alack of rational tariff structures, which match the costsand charges in relation to the incidence of benefits; lowcurrent tariff levels in most cities make a transition to fullcost recovery politically difficult, due to the high initial revisionrequirements; lack of customer consultation in serviceplanning, which is needed to link investment decisionsto effective demand; inadequate accounting systems whichdo not make it possible to assess the real costs of services;and lack of a system of indexation which would enablerevenues to keep up with the rising cost of inputs.The existing pricing system and structures are thus inadequateand unsustainable. Price reform under these circumstanceswould seem not only desirable, but also essential.An efficient system of urban infrastructure services iscrucial for economic growth. The competitiveness of nations,as evident from many developing countries, dependson the competitiveness of cities. Price reform of urbanwater is a crucial agenda.Research in India on water pricing is limited and focused on(a) the adequacy of water tariff and (b) issue of leakages. Inthe case of water, the merits of intermittent supply versusregular supply have also been examined along with the costof metering. An upward revision of water tariff to thepoint of full cost recovery and an indexation mechanism toallow for general price increase, reduction of leakages, changeover from unmetered to metered supplies in the case ofurban water and greater efficiency in revenue collection havebeen highlighted in the agenda for improving the operationsof water services. These are important components in thefinancial viability of urban water utilities.11The Bangalore Water Supply and Sewerage Board recently estimated the long–run marginal cost of water to be supplied by Cauvery at Rs. 43/kl. Asagainst this, the weighted monthly average tariff is about Rs. 14.17

Urban Water Pricing: Setting the Stage for ReformsThe limited analysis of the finance data of urban waterutilities undertaken for this study has discerned several areas,which, in a way, point to some directions in developinga framework for reform. Five areas are underlinedhere. The first is of primary importance and relates to therelevance and effectiveness of the existing pricing systemand structures. The pricing structure of urban water is differentiatedaccording to the nature of users, quality, quantityand several other factors. What tariff rate is appropriatefor which part or sub–part and which charging instrumentis appropriate for which section stands neglected inmost earlier works on pricing matters. It needs to beemphasised that the existing pricing structures make it impossibleto assess whether they can achieve full cost recoveryor even partial cost recovery. The pricing structures areobsolete and need to be replaced with structures that aresimple, easy to apply and transparent.A second issue, which has received surprisingly scant attention,is concerned with the user or consumer base, which islimited, narrow and possibly over–exploited. Only 30 to40 percent of urban households pay for water and othersimilar services; the likelihood of any price reform toachieve financial sufficiency and economic efficiency wouldbe dim.A third issue is linked to the unbalanced revenue base ofwater utilities, with much of the burden currently beingborne by the non–domestic sector. The finance data ofurban water utilities has clearly brought out the extent ofcross–subsidies that exist in the water sector. It has twoadverse impacts: (a) the non–domestic users, mainly industryand commerce, pass on the costs associated withhigher tariff to domestic users in the form of higher pricesof their products, (b) lower prices for households meansmore wastage of water. It is imperative for water utilitiesto move towards a more rational pricing structure, whichmay mean price increases for the domestic users and pricedecreases for the non–domestic users. A rational structuremay yield a positive net benefit as the non–domestic usersmay be expected to pass on the cost savings associatedwith lower water prices in the form of lower output prices.A fourth issue is the complete accounting of costs. Althoughthis paper has utilised the finance data, uncertaintyexists as to whether all costs attributable to the service havebeen accounted for. Doubts arise on account of theindivisibilities of cost components.Finally, there is the complex issue of the metering of urbanwater. While the merit of metering is accepted as it issaid to allow households to determine how much waterthey are prepared to pay for, the issue is: how much differencedoes metering make to revenues in practice? Incountries where this has been empirically examined, meteringis said to have reduced consumption among, relativelybetter-off households; in others, particularly lowincomegroups where consumption levels were low, consumptionregistered an increase reflecting the unmet demandfor the period when water was unmetered and rationed.Experiences of other countries suggest that meteringshould form an integral part of the overall pricereform agenda, rather than being taken up in isolation.Metering should be promoted on the basis of fairness andas a means of improving operating efficiency and loweringcosts.International PracticesExamples of “best practice” in this sphere are fewer thanin other areas such as decentralisation and private sectorparticipation. From the limited evidence available, thereappears to be some attempt at rationalisation of tariffs indeveloping countries. Protection of the poor has beenattempted through a lifeline block, which is cross-subsidisedby other higher consumption blocks. In order to overcomethe problem of high rate revisions required for fullcost recovery, a phased introduction of full cost pricing isadopted, as was done in Guinea. The service delivery inGuinea was a commercial operation exercised by a privateoperator. Politically feasible increases in tariffs were madepossible through external credit, which was phased, in orderto recover full costs from customers over a pre-determinedperiod.Innovative examples of infrastructure charges for provisionof block level distribution and collection networks18

Water Pricing: Setting the Stage for Reformsare available from Brazil, where, under a condominial financingsystem, “households pay for the on-lot costs, blockspay for the block sewers and decide what level of servicethey want from these”. Policymakers in Brazil are consideringdeveloping water markets to allocate water. Watermarkets are uncommon in Brazil, but have existed in theCariri region. While the Cariri market is a small isolatedsystem, it provides indications of the value of water, thepossibilities of allocating and enforcing water rights andthe willingness of water users to pay and cooperate toassure a secure water supply.A World Bank study of water pricing experiences classifiescountries as high, medium and low according to whatit calls a “water pricing progress index” (WPPI). It preparedthe index using two criteria, viz., current pricing practicesand current mode of funding (The World Bank, 1997).Countries that used some economic pricing method or atthe very least, recovered full operation and maintenancecosts and a portion of capital and maintenance costs and aportion of capital costs from users were grouped in thehigh progress category. Countries which financed watersystems with governmental resources were categorised aslow progress countries. The findings of the study are shownin Table 22 below.Other overseas experiences suggest that, in some circumstances,it is possible to charge for actual usage at levelshigher than at the individual household. In others, participationof stakeholders to decide on standards and investmentpriorities in relation to cost and prices is found to beuseful in water resource planning. In recent concessionTable 22: Relationship between Pricing Reforms and Selected Country CharacteristicsRank High Medium LowGross National ProductWPPI High Australia, France, New Zealand, Botswana, NamibiaSpain, United StatesMedium Israel, Italy, United Kingdom Brazil, Portugal, MadagascarLow Canada Tunisia India, Pakistan,Tanzania,UgandaWater AvailabilityWPPI High Australia, Botswana, France, Namibia,New ZealandSpain,United StatesMedium Brazil Italy, Portugal,United Kingdom,MadagascarIsrael, TunisiaLow Canada India, Pakistan,Tanzania, UgandaBudget DeficitWPPI High Australia, France, Namibia, Brazil Botswana,Spain, United StatesNew ZealandMedium Israel, Italy, Portugal, Tunisia, United KingdomMadagascarLowSource: World Bank 1997Canada, India, Pakistan,Tanzania, Uganda19

Urban Water Pricing: Setting the Stage for Reformscontracts for water services, the participation of the privatesector has also helped to reduce the average tarifflevels. This is largely due to the significant efficiency improvements,which have been possible with the entry ofthe private sector. In Manila, the tariff proposed by thewinning bid for half the city was almost a fourth of theexisting tariff. This clearly highlights the link between improvementsin efficiency and financial viability with acceptabletariff levels. All three criteria much be satisfied for thetariff structure to be effective.Objectives of Water PricingSetting water tariffs requires striking a balance between fourmain objectives. 12Revenue suf ficiency: From the point of view of watersupplying entities, the main purpose of tariff is cost recovery.The revenue from water users should be sufficientto pay the operation and maintenance cost of the waterutility’s operations, to repay loans undertaken to replaceand expand the capital stock and to provide a return oncapital at risk. The revenue stream must thus be adequateto attract both equity capital and debt financing. Ideallythe revenue stream should be relatively stable and not causecash flow or financing difficulties for the utility.Economic efficiency: Economic efficiency requires thatprices be set to ensure that consumers face the avoidablecosts of their decisions. In other words, water prices shouldsignal to consumers the financial and other costs imposedon the rest of society. From an economic efficiency perspective,a tariff should create incentives that ensure, for agiven water supply cost, that users obtain the largest possibleaggregate benefits. This means that volumetric watercharges should be set equal to the marginal cost of supplyingwater. In practice, it is commonly assumed that themarginal cost of supplying water can be approximated bythe average incremental cost (AIC), i.e., the average costof water from the next water capacity expansion project.Alternatively, the AIC of additional water may be the unitcost of reducing unaccounted-for-water (UFW).Equity: Equity means that the water tariff treats similarcustomers equally and that customers in different situationsare not treated the same. This would usually be interpretedas requiring users to pay monthly water bills thatare proportionate to the costs they impose on the utility bytheir water use.P over ty alleviation: Water services are often seen as a“basic right” and their access as necessary regardless ofwhether or not people can pay. This objective leads manypeople to recommend that water services be providedfree, at least to the poor. Providing water free throughprivate connections can conflict with the objectives of costrecovery and efficient water use.Tarifariff f RestructuringGiven the objectives, the first step in rationalising tariffstructures is to establish a link between tariff and cost byintroducing separate charges, for the following.i) Connections: a connection fee to cover the direct costof connecting to the municipal mains. In case of amulti-storeyed system at the block level, it may includethe cost of on-site networks; and a charge for management,billing and metering, which may cover thefixed cost of maintaining the connection;ii) Distribution systems: an infrastructure developmentcharge to cover the cost of developing or augmentingthe secondary and tertiary distribution systems;iii) Consumption: a consumption charge for water, on avolumetric basis to cover the cost of creating andmaintaining water abstraction capacity and the primarydistribution system, as well as the economic costs ofwater procurement and operating cost of supply. Allother charges are of no revenue significance.The key to pricing, however, is the consumption chargefor water. Which charging method would ensure compatibilitywith the objectives? It is necessary to underscorethe role of the ‘equity’ objectives in water tariff fixation.Secondly, acceptable tariffs require that adequate service12Adopted from Dale Whittington, 2002. Municipal Water Pricing: Getting Started on Tariff Reforms and Subsidies in South Asia. National Instituteof Public Finance and Policy, New Delhi.20

Water Pricing: Setting the Stage for Reformslevels are provided and maintained for the poor withintheir affordability limits. Typically, it has meant fixing lowerthan optimal levels of pricing, ignoring the financial viabilityconsiderations. Instead of lower tariffs, it is useful tobase tariff levels on financial viability criterion and thenmanage affordability issues through mechanisms such as:i) A lifeline block in the tariff structure for consumption-relatedtariff;ii)Providing explicit subsidies to the poorer sections forconnection and infrastructure development charges.Under the existing system, subsidies for slum settlementsand special social groups are available from the stateand central government plan allocations. It is essentialthat such subsidies are made explicit, pooled and allocatedin relation to the overall size of the problem;iii) Developing and using appropriate credit systems tospread the payment for infrastructure and connectioncharges over time;iv) Separation of water supply accounts and budgets anda complete assessment and valuation of all its assets.Such provisions already exist in Maharashtra as perSection 95 of the Maharashtra Amendment pursuantto the 74 th Constitution Amendment Act;v) Clear guidelines on costs to be included in determiningthe different charges;vi) Measurement of unaccounted for water and the collectionefficiency of different charges with a clear indicationof their (a) impact on average tariff levels,and (b) measures to reduce inefficiencies; andvii) Indexation of average tariff.An important decision in respect of tariff restructuring isto make a choice between a two-part tariff and an IBTstructure. The IBT structure has been questioned on thegrounds that it gives households with private connectionsmuch more water than is needed at a very low price. 13 AnIBT structure is an effective method of water charging tothe extent that the initial block can be fixed at levels, whichcorrespond to a level equal to a household’s essential waterneeds.Financial viability requires that, over time, revenues equalexpenditure, both operating and capital. It is essential torecognise and reduce inefficiencies related to excess manpower,poor collection of revenues and high levels of waterleakages in the system. It is imperative that strong incentivesare introduced to reduce these inefficiencies. A criticalaspect in sustaining financial viability over time is tointroduce indexation of charges so that the revenues keepup with increases in cost of inputs, which are beyond theutility’s control. In addition, it is important to structuretariffs in ways which do not create disincentives for metering.One alternative would be to introduce group metersin specific settlements. It is likely that, given the historicallylow level of tariffs, many cities will only be able to achievefinancial viability over time. Such a time frame needs to bedetermined and in the interim, subsidies provided to supportthe transition process as is implied in the City ChallengeFund (CCF).Another important aspect concerns the possible externalitiesfrom water and sewerage services. The environmentaland health benefits, especially from improved water qualityand sewage collection and treatment, generally accrueto larger groups and are more public in nature. Subsidiesmay be necessary to achieve these benefits. Any such subsidiesshould be internalised at appropriate levels, such as acity or group of cities. Ideally, these groups need to jointlydecide on appropriate service levels, investment and resultanttariff levels. This requires that the level of subsidiesbe predictable and allocated in a transparent manner.The need for price reform in water is evident and compelling.The implications of water under-pricing are wellunderstood. Yet, more needs to be learnt about the structureand distribution of demand, the cost structure andthe magnitude of external costs associated with urban watersupply. This is a perspective that goes beyond pricing ofservices.21

Urban Water Pricing: Setting the Stage for ReformsAnnexureTwo-Part Tariffs and Benefits for the PoorWater is a peculiar good in that it isessential to life. Therefore the utility itcontributes at low levels of consumptionis very high. But it has many non-essentialuses, and at high levels of consumption.The contribution to utility of the marginalunit may be very low. Demand is inelasticat low levels of consumption but veryelastic at high level. a This has clearimplications for the pricing of water. Figuredevelops a simple example with one rich(R) and one poor (P) consumer. The richconsumer has income level Y Rand the poorY P. Y can be measured in terms of timeavailable, with the assumption that timecan be translated into income. bIndifference curves are drawn for each type,showing the combination of water andconsumption of other goods O, which wouldkeep the consumer at the same level ofutility. The indifference U Ois the reservationlevel of utility. It originates on the Y-axiswhen other goods consumption O equals income.Initially, the indifference curve is steep; the consumeris willing to give up large amounts of other goods whenwater consumption is low. The curve also approachesthe X-axis asymptotically since water consumptioncan be very large at a low price in terms of other goodsforegone.Water is priced through a two-part tariff consisting of afixed payment (F), which entails some free units ofconsumption, and a price per unit of additionalconsumption of water, he is able to reach a level ofutility higher than his reservation level. Now, supposein period 1, there is no charge for the poor consumer,but he is subject to rationing of water. The implicitcost of queuing, etc. he is subject to, F P1, drives him tohis reservation utility U PO. This F P1, is a net welfareloss since it does not go to the service provider but is areal coping for the poor consumer.The rich consumer is charged a fixed cost F P1, whichcovers consumption of some water units along thehorizontal section, and pays a low price P 1per unit ofadditional water he consumes. The budget line givesthe rate at which he can convert other goodsconsumption of Y – F into extra units of water. Thefixed cost is measured on his reservation utility curveand the price line starts from the point on U ORgivingfree consumption at the fixed cost charged. His waterconsumption is at Q R1where his budget line is tangentto his indifference curve. A fixed cost that does notextract all surplus and his ability to adjust hisContd.22

Annexurecommodity consumption at the margin take him abovehis reservation utility U OR. Since he is on the elasticportion of his demand curve, he consumes a large amountof water but derives a low utility from the marginal unit.Now, consider a price reform in period 2, where bothconsumers are charged a higher unit volume price P 2,but lower fixed costs than they were paying in period 1.Thus the rich consumer pays FR2 > FP2. Theconsumption of the poor consumer goes up QP2, buthe remains on the inelastic part of his demand curve,and he reaches a higher level of utility, U1P. Althoughhe is paying a small fixed cost, lower than his earliercoping costs, his choice of additional units ofconsumption is voluntary, and takes him to a higherindifference curve. A French student of BMC’s watersupply reported that in the current rationing regimeconsumption is taken to be 240 lpcd for the richconsumer and 45 lpcd for slums. c The changes proposedwould improve water equity and the welfare of the poor.The consumption of the rich consumer falls much more.But since he was on the elastic part of his demand curve,the total utility loss from the marginal units ofconsumption is not very high. A high fixed and low volumecharge turns all rich consumers into high volumeconsumers. If the fixed cost he was paying earlier washigh, he may continue to be on the same utility level U 1R.AIf the fixed cost he was paying earlier was lower at Y RR(

Urban Water Pricing: Setting the Stage for ReformsGlossaryAverage incremental cost (AIC): The average cost of futurewater supply projects. The average incremental costs can be calculatedby dividing the discounted value of future supply costs by the(similarly discounted) amount of additional water.Depreciation: A reduction in the value of an asset through wearand tear. The consumption of capital assets is one of the costs ingenerating revenues and should therefore be taken into accountwhen calculating total costs.Discounting: A deduction from face value of future costs andrevenues. Fundamentally, future costs are less burdensome thanpresent costs and present benefits (or revenues) are preferable tofuture benefits (or revenues). It is therefore necessary to adjust forthese “time preferences” in order to obtain a true present value.Environmental sustainability: The need to follow a path ofdevelopment that is environmentally sustainable, where the scarcityof water resources is recognised.Financial viability: The need for water service authorities torecover from water users all the costs associated with the provisionof water services, including the cost of capital, refurbishment andreplacement.Marginal cost pricing: Setting the unit price of all goods equal tothe cost of producing and supplying the next or last unit.Social equity: The need to redress the imbalances of thepast with respect to the provision of adequate access to watersupply services.Water supplying entities: Refers to municipal authorities, stateleveland city-level parastatal boards, Public Health Departments,and who have either the statutory responsibility for the provisionof water services or are de facto providers of water.24

ReferencesAndrews, Charles T. and Yniguez, Cesar E. 2004. ‘Water in AsianCities’, Asian Development Bank, Manila.Asian Development Bank. ‘Water for All’, The Water Policy of theAsian Development Bank, Manila.Boland, John J. and Whittington, Dale Undated. ‘The PoliticalEconomy of Water Tariff Design in Developing Countries:Increasing Block Tariffs versus Uniform Price with Rebate’, inAriel Dinar, 2000. The Political Economy of Water Pricing Reforms.Oxford University Press, Washington D.C.Brook, Penelope J. and Locussol, Alain Undated. ‘Easing TariffIncreases: Financing the Transition to Cost-Recovering WaterTariffs in Guinea’, Mimeo (OBA Book Homepage).Denver, Colorado 1991. Water Rates Manual, American Water WorksAssociation.Dinar, Ariel 2000. The Political Economy of Water Pricing Reforms.Oxford University Press, Washington D.C.Foster, Vivian et al. undated. ‘Water Tariffs and Subsides in SouthAsia: Can Subsidies be better Targeted’, mimeo.Government of India, 2002. National Water Policy, New Delhi.Infrastructure Development Finance Company, 2004. IndiaInfrastructure Report. 3i Network. Oxford University Press,New Delhi.Ministry of Urban Affairs and Employment, 1996. Report of theWorking Group on ‘Urban Water Supply and Sanitation Sectorfor the Ninth Five Year Plan (1997-2002)’, New Delhi.Planning Commission, 2002. Tenth Five Year Plan, 2002-2007,New Delhi.Planning Commission, 1997. Ninth Five Year Plan, 1997-2002,New Delhi.Raghupathi, Usha P. and Foster, Vivian 2002. ‘Water Tariffs andSubsidies in South Asia’, mimeo.Rana, P. S. 2003. ‘Pricing of water for Sustainability’, mimeo.The World Bank, 1999. Urban Water Supply and Sanitation, AlliedPublishers, New Delhi.The World Bank, 1997. Water Pricing Experiences: AnInternational Perspective. World Bank Technical Paper No.386,Washington D. C.The World Bank, 1995. Urban Water Supply and Sanitation, quotedin ‘UNDP-Water and Sanitation Programmes, Water for India’sPoor: Who Pays the Price for Broken Promises’, October 1999.Walker, Ian et al. undated. ‘Pricing, Subsidies and the Poor Demandfor Improved Water Services in Central America’. mimeo.Whittington, Dale 2002. ‘Municipal Water Pricing: Getting Startedon Tariff Reforms and Subsidies in South Asia’, NationalInstitute of Public Finance and Policy, New Delhi. mimeo.Zerah, Marie-Helene 2000. ‘Water: Unreliable Supply in De’, CentreDe Sciences Humains, New Delhi.25

About the Series EditorsAasha Kapur Mehta is Professor of Economics at the Indian Institute of Public Administration, New Delhi and leads theChronic Poverty Research Centre’s work in India. She has a Masters from Delhi School of Economics, an M.Phil fromJawaharlal Nehru University and a PhD from Iowa State University, USA. She has been teaching since 1975, initially ata college of Delhi University and then at IIPA since 1986. She is a Fulbright scholar and a McNamara fellow. Her areaof research is now entirely focused on poverty reduction and equity related issues.Pradeep Sharma is an Assistant Resident Representative and heads the Public Policy and Local Governance Unit inthe India Country Office of United Nations Development Programme (UNDP). A post-graduate from University of EastAnglia (UK) and Doctorate from Jawaharlal Nehru University, he has held several advisory positions in the Governmentof India and has taught economic policy at LBS National Academy of Administration, Mussoorie. He has severalpublications to his credit.Sujata Singh is an Associate Professor at the Indian Institute of Public Administration. She completed her doctoralstudies in Public Administration and Public Policy at Auburn University, USA. Her primary research interests are in thearea of Comparative and Development Administration, Public Policy Analysis, Organizational Theory and Evaluation ofRural Development Programmes.R.K. Tiwari is Senior Consultant, Centre for Public Policy and Governance, Institute of Applied Manpower Research,Delhi. He was formerly Professor of Public Administration at the Indian Institute of Public Administration (IIPA), NewDelhi. He received his education at Gwalior, Allahabad and Delhi. He has undertaken a number of research studies inDevelopment Administration, Rural Development, Personnel Administration, Tribal Development, Human Rights andPublic Policy. He has conducted consultancy assignments for the Department of Posts and in the Ministry of RuralDevelopment, Government of India; and for the Government of Orissa and the Narmada Planning Agency, Governmentof Madhya Pradesh. He has published several books.