Opinion - News Analysis   

Privatising water supply — a risky business

D. Narasimha Rao

The public must get involved. The poor stand to lose too much if the reforms fail.

MANY BELIEVE that delegating public sector services to private operators obviates the need for public sector reform. They are wrong. When a government outsources management of, say, water distribution to the private sector, it shifts its role from the management of water supply to the management of contracts for water supply. And it is usually as competent (or not) at both.

So, if the Delhi Government hands over the Delhi Jal Board's (DJB) water distribution function to an MNC, it has not found a solution to the DJB's institutional malaise. It has only put it in the background — behind an expensive and risky management contract. As expected, the reforms process reflects the very ills reformers are trying to cure. Further, the poor will very likely see higher prices and reduced access. And yet, the scope of the reforms does not seem to address critical problems of inequitable distribution, affordability, and environmental degradation.

The Delhi water reforms are part of a wave across the country, including Maharashtra, Madhya Pradesh, and Karnataka. In Delhi, the proposed management contract for water distribution transfers key operational and investment decisions to an MNC in order to reduce losses and rehabilitate the distribution system. The reforms also intend to squeeze out informal water markets (tankers, borewells) and centralise distribution under the private operators. The Government has mooted the institution of a regulator to set tariffs to recover the DJB's costs and remove subsidies.

That is more information than the Government has proactively shared with Delhi's citizens about the reforms, until last year. And that is part of the problem. Donor agency, consultant, and MNC pressures have dominated the reform process, ongoing for over six years, without any public debate and open consultations. This is in clear violation of the spirit of democratic and transparent governance.

But it is also typical. Secrecy shuts out resistance, enables false promises to be made. In a one-sided negotiation process, weighing heavily on the side of sponsors with their expertise and influence, the balance of risk allocation is bound to favour private operators. The poor, as the least attractive customers, will likely bear the brunt of these risks.

So, performance targets will exist in the contract, as will penalties for non-compliance. But will these be strict enough? (In telecom, private operators did not meet their rollout obligation in rural areas; they paid all required penalties). The reforms promise continuous (24x7) water supply — Delhi's water supply is not so much insufficient as inequitably distributed and ridden with losses. Private operators will supposedly provide 24x7 supply to all by plugging all leaks. But loss reduction targets may be rendered meaningless by the absence of adequate information to set a realistic baseline. Further, private operators have a greater incentive to divert water from the poor to lucrative customers. They plan to replace "informal" sources of supply (on which a third of Delhi relies) with piped connections, but with what obligation and at what cost?

High price tag

These risks of non-performance come with a high price tag. Private operators will get paid fixed (not performance-based) annual fees in dollar terms. They will request funds for capital investments, which will be a pass-through from the government, with no incentives for cost prudence. The DJB's total operational budget may increase by 50 per cent with all estimated expenses. Do we have any benchmark or basis for preventing cost padding?

The thinking underlying these reforms is that cost recovery is the root of the water sector's problems, and only (international) private companies can improve management and plug leaks. The DJB will thereby recover costs, and plough these back into improved service to all (including the poor).

This sterilised view misses many points: as mentioned, private management will be only as good as the contracts that regulate them; more money won't cure inequitable distribution. Only if the poor have a voice, both in policy formulation and grievance redress, and the DJB is forced to listen will service to the poor improve. We are curiously moving away from them in the proposed reforms, besides creating more opportunity for inequitable service; no matter how much tariffs are `rationalised', subsidies to some groups are unavoidable, and just — although they have to be better implemented. But the Government has no apparent plan for designing improved, targeted subsidies.

There is no expertise in water distribution over which the international private sector has a monopoly. On the contrary, MNCs have no ground experience with India's water distribution. Their experience in developing countries is appalling. Exorbitant prices, public outrage, reduced access to the poor, are commonplace.

The most well known example is Cochabamba, Bolivia, where water prices were increased by 200 per cent upon takeover, and the water company's contract was eventually repealed. Just days ago, a private company bowed out of its contract in Argentina, because of the unwillingness of the public to accept rates pegged to the U.S. dollar and indexed to U.S. inflation. Negligence of service to poorer areas led to faulty meters and billing in South Africa, and disease outbreak in Manila.

Proponents of privatisation would be cautious about private involvement in the water sector, because it has too many market failures. Water is an essential service, and arguably a constitutional right. It is also a monopoly service. Taken together, this is a classic environment for private operators to hike costs. Water has serious health and environmental externalities — the price of neglect can be life-threatening. This is a worry in poorer areas, which are likely to be low on the list of private operators' priorities (consulting reports indicate they expect to rely on relationships with NGOs to serve these areas).

Thus, in water more than other sectors, the private sector will deliver only if effectively regulated: enforceable consumer safeguards, monitoring mechanisms, performance incentives, service standards, and clear channels of accountability through consumer engagement. Given the manner in which the current reforms are developing, and our institutional weaknesses, this seems highly unlikely.

This risk is evident in the DJB's own words (on its website): "Independent regulator to ensure increase in tariffs with improved services subsequently."

The Government is being seduced into hastily applying borrowed models with track records of failure. In the least, the Government should provide full disclosure of the proposed reforms, including explanations of how risks of non-performance and cost padding will be mitigated. The public must get involved to demand transparency, evaluate risks, and explore alternative solutions before contracts are awarded. With water, the poor stand to lose too much from failed reforms.

(The writer is Visiting Faculty, Indian Institute of Management, Bangalore.)

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