WATER 2 T A R I . . S & S U B S I D I E S I N S O U T H A S I A APERP A Scorecard for India RE.ORM O. THE WATER AND SANITATION SECTOR is occurring in many countries, and offers the potential to improve services to all. Of particular concern, however, is the situation of the poor, and reform must be designed so that they receive increased access to affordable services. A key issue in this regard is water pricing, which is one of the main variables affecting the distribution of benefits between different stakeholders. However, experience shows that water pricing, and the subsidies which are often delivered through water tariffs, can be a source Graham-Harrison of major inefficiencies in the sector. While affordability has been one of the prime Kathleen concerns of those setting tariffs and designing by subsidies, there may be significant flaws in many T Picture common pricing strategies and subsidy delivery mechanisms. Rather than providing affordable he aim of this paper is to provide a scorecard for current urban water tariffs and subsidies in India, assessing how water to the poor, these may in fact be leading well they perform and identifying changes that may be to financial unsustainability of utilities, lack of needed in the context of the wider sector reform process. The access to services, and inequity. The reform paper concludes that Indian water tariffs and subsidies do not process provides the opportunity to rationalize score very highly in fact they meet only one out of four important and reconsider the design of tariff and subsidy policy objectives: they are extremely affordable. However, this structures, and seek new ones which may provide comes at the expense of cost recovery, economic efficiency and better results. fairness. Current subsidy levels are significantly higher than they need to be, given that even the poorest households could afford to meet their subsistence needs with tariffs several times higher This series of papers is designed to examine these issues than current levels. On the other hand, full cost recovery tariffs in South Asia. It is designed to present the basics of tariff would probably create affordability problems for at least part of and subsidy issues, to disseminate recent research findings, the population. However, the absence of targeting mechanisms and to stimulate debate on the subject. means that subsidy resources are currently wasted on many The preparation of these papers was funded by the Public- households that could afford to pay. Restructuring tariffs to meet Private Infrastructure Advisory .acility (PPIA.). Additional financing was provided by the World Bank, the World cost recovery levels, and introducing better targeting for subsidies, Bank Institute and the Water and Sanitation Program. would allow the state to significantly reduce its current subsidy budget, and strengthen the financial position of water utilities allowing them to provide better service for all. Water and Sanitation Program A SCORECARD .OR INDIA How well do Indian water tariffs and subsidies serve the citizens of urban India? The aim of this paper is to provide a scorecard for current urban water tariffs and subsidies in India, assessing how well they perform, and identifying changes that may be needed in the context of the wider sector reform process. The scorecard follows evaluation criteria developed in an earlier paper in this series1. Thus, tariffs are assessed in terms of the extent to which they contribute to cost recovery, economic efficiency, fairness and affordability, while subsidies are assessed in terms of whether they Stubbs/WSP-SA respond to a genuine need, achieve accurate targeting Guy of benefits towards the poor, maintain low administrative by costs, and avoid generating perverse incentives. Picture In India, it is the State Government that is responsible for choosing tariff structures for urban water supply. The There is a very wide variety of water State Governments generally prescribe minimum tariffs charging practices across India. However, for municipal bodies of various categories, and behind this diversity, there are a number of individual cities have the option to set the tariff above common underlying characteristics. this minimum level in order to recover costs, subject to State Government approval. As a result, there is a very wide variety of water charging practices across India. However, behind this diversity, there are a number of The evaluation is based on data from a survey of common underlying characteristics. water charging practices in Indian cities. The survey Virtually all Indian cities operate a mixture of sample includes all 23 metropolitan cities (defined as measured and unmeasured tariffs, due to the relatively those with population over a million), plus a low coverage of metering (see Table 1 for details). representative sample of 277 Class I and Class II cities Uniform volumetric charges are by far the most (defined as those with a population between 50,000 and common tariff structure for measured charging; 1,000,000). Overall, the cities represented in the sample although increasing block tariffs (IBTs) are also have an aggregate population of 140 million people, of common, particularly in metropolitan cities, flat-rate whom about half reside in the metropolitan cities and tariffs are by far the most common tariff structure for half in cities of relatively smaller size. All of the Indian unmeasured charging. .errule-based tariffs (flat 2 States are represented. charges differentiated according to the diameter of 1Whittington, Dale, Boland, John and .oster, Vivien, Water Tariffs and Subsidies in South Asia: Understanding the Basics, World Bank 2002, (Paper #1 in this series). W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A Table 1: Overview of charging structures in India Metropolitan cities Smaller cities and towns # % # % Metered Uniform volumetric tariffs 11 58 89 77 Increasing block tariffs 8 42 26 23 Total 19 100 115 100 Unmetered .lat-rate charge 10 56 135 72 .errule-based charge 7 39 37 20 ARV-based charge 1 5 10 5 Tap-based charge 0 0 6 3 Total 18 100 188 100 Source: Adapted from NIUA, 2002 Note: Of the 22 metropolitan cities, three do not have any metered connections and four do not have any unmetered connections. the connection) are also quite widespread, Cost recovery particularly in metropolitan cities. However, since The most basic requirement of any water tariff is to all houses tend to use half inch connections, the use raise enough revenue to cover the cost of service of ferrule-based charges only really affects the tariff provision. How close do Indian water tariffs come to differential between houses and apartment buildings. meeting this goal? A handful of cities also apply charges based on the Although there is relatively little evidence on the assessed value of the dwelling or, in some cases, the level of tariffs that would allow full recovery of number of taps. operating, maintenance and capital costs in India, there have been a few recent consultant studies of operating How Well do Indian Water Tariffs Perform? and maintenance cost for specific metropolitan cities. In an earlier paper, it was noted that water tariffs can be These have produced results of Rs.13 (US$ 0.26)* per designed to meet a number of different policy objectives. cubic meter for Chennai, Rs.16 (US$ 0.32) per cubic These include cost recovery, economic efficiency, fairness meter for Bangalore and Rs.17 (US$ 0.34) per cubic and affordability. Although it can be difficult to meet all of meter for Hyderabad. This suggests that Rs.15 (US$ 0.30) these objectives at once, a well-designed water tariff should would be a reasonable benchmark for current operating make an important contribution to one or more of them. and maintenance costs. However, it is well-known that 3 In this section, we evaluate how well water tariffs in urban utilities currently operate at very low levels of efficiency, India perform against each of these criteria. suggesting that an efficient company might have * Rate of conversion: 1 US$ = Rs 50 as on .ebruary 2003 W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A A SCORECARD .OR INDIA operating and maintenance costs significantly below this level. .igure 2: .ixed charges for water in India Estimation of capital costs is much more difficult, due to limited asset inventories and methodological accounting issues, and no reliable public information is available at this time. However, capital costs are evidently very significant in the water sector and their incorporation in water tariffs would substantially raise the benchmark outlined above. In stark contrast, the typical price charged to residential consumers in India is around Rs.1.5 per cubic meter (US$ 0.03), only about a 10th of operating and Source: Adapted from NIUA, 2002 maintenance costs (.igure 1). Moreover, even in cities with rising block tariff structures, only in Chennai and Bangalore do the tariff rates charged for the highest blocks of consumption ever come close to recovering costs even for operation and maintenance. In Chennai, The charges levied on residential customers pay Rs.15 per cubic meter for consumption users are less than a tenth of the likely beyond 20 cubic meters per month. Although, to put full economic cost. this in perspective, only a small fraction of Chennais water consumers are metered. In Bangalore, tariffs only climb into the cost recovery range for the tiny minority of users consuming more than 50 cubic meters per month. .igure 1: Volumetric tariffs for water in Indian cities Neither do unmetered customers come anywhere near to cost recovery. With average fixed charges of around Rs. 45 per month (see .igure 2), these customers only contribute enough to pay for the operating and maintenance cost of providing three cubic meters per month, when in reality most unmetered households are probably consuming closer to 20 cubic meters per month. Although industrial customers face substantially higher tariffs than domestic users, many of them 4 continue to pay less than the full economic cost of the service. Typical industrial tariffs lie around Rs.12 (US$ Note: .or cities with IBTs the graph reports the average volumetric tariff for 20 m3 of consumption. 0.24) per cubic meter in metropolitan cities, and Rs.5 Source: Adapted from NIUA, 2002 (US$ 0.10) per cubic meter in smaller cities. W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A tariffs. The charges levied on residential usersboth .igure 3: Average industrial water tariffs in India for connection and consumption, with or without meters, and irrespective of the tariff structure chosen are less than a 10th of the likely full economic cost. Hence, Indian water tariffs essentially fail to make any significant contribution to recovering the costs of service provision. Economic efficiency An important function of water prices is to avoid wastage of water by ensuring that consumers are aware of the true cost of the water they use. Do Indian water tariffs contribute to promoting the economical use of water? Note: Average tariff based on a normalized consumption of 100 cubic In order for prices to promote economic efficiency meters per month. Source: Adapted from NIUA, 2002 consumers must be metered and measured tariffs must reflect the incremental cost of developing new water sources. Indeed, industrial tariffs lie below the benchmark level It was already seen that tariffs do not even come of Rs.15 (US$ 0.30) per cubic meter for operating and close to reflecting the average cost of water supply, let maintenance costs in two-thirds of metropolitan cities and 80% of smaller cities (see .igure 3). Not only do water use charges fail to recover the .igure 4: Connection charges in India costs of system operation and maintenance, but official connection charges also lie well below the typical costs of expanding the network to serve new communities. Connection charges in Indian cities are typically around Rs.1,000 (US$ 20), compared to typical expansion costs of ten times that value: around Rs.7,500 (US$ 150) per connection. Although low relative to economic costs, these connection charges may still represent a barrier to access by the poor. Only about 10% of utilities levy connection charges higher than Rs.5,000 (US$ 100) (see .igure 4)2. In summary, only a minority of industrial customers in India are paying anything close to cost recovery Source: Adapted from NIUA, 2002 5 2The reality is, however, that many people, particularly the poor, pay much more than the official connection charge as they have to pay the costs of laying the missing tertiary network, often duplicating pipes that their neighbors have already laid. Utilities frequently also levy additional charges and require substantial deposits. This issue, and the burden it puts on the poor, is discussed in Paper #3 of this series. W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A A SCORECARD .OR INDIA alone the incremental cost of new sources which tend to be more expensive than water currently supplied. .urthermore, only a handful of metropolitan cities in Indianotably Bangalore, Kochi, Mumbai and Pune have come close to achieving universal meter coverage. In other metropolitan cities, only 62% of households are metered, while in smaller cities the coverage rate rojectP falls to 50%. Moreover, the official meter coverage .IRE-D figures potentially overstate the true extent of metering. Anecdotal evidence suggests that meters are often non- ndo-USAIDI functional either due to the low quality of the equipment by and intermittent nature of supply, or are deliberately Picture tampered with by the household. .or both reasons, many metered customers often end up paying fixed charges unmetered customers get a fair deal relative to metered (sometimes based on their last recorded meter reading), customers, and whether industrial customers are fairly although the exact extent of this phenomenon treated relative to domestic customers. The answer in is unknown. both cases is negative. The other side of the story is that, in practice, water Of course, use of unmeasured charges is intrinsically supply is so limited in many cities that there is little unfair insofar as all customers are charged the same scope for wasting water. It is not uncommon for water amount irrespective of how much they consume, which to be available for barely an hour a day, andowing to means that large consumers inevitably gain at the inadequate pressure on the distribution networkpeople expense of the small. However, fixed charges can at struggle to collect water even when it is available. As a least be fair on average if the level of the fixed charge result, customers are rationed physically in their use of is about the same as the cost of buying an average level water, rather than controlled via price. of water consumption under the volumetric tariff In summary, with low tariffs and low effective meter structure that applies in the same city. coverage there are no real economic incentives for This can be evaluated by calculating how much Indian consumers to economize on water use. On the water unmeasured customers would be able to buy if other hand, the opportunities to waste water may they spent their fixed charge on metered water. In be limited in many cities, where owing to inadequate about three quarters of cities this equivalent and intermittent supply consumers effectively face consumption is less then 20 cubic meters per month, physical rationing. which is a typical level of household water consumption. The implication is that unmeasured .airness customers are getting a relatively good deal, since 6 The principle of fairness states that consumers should they are probably consuming more water than they not be charged different amounts for what is essentially could have bought at the same cost under the metered the same service. How well do Indian water tariffs stand tariff. This is unfortunatenot only for reasons of up to this test? Two key areas to examine are whether fairnessbut because it creates resistance towards W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A network. The mark-ups for industrial customers tend to .igure 5: Histogram of ratio of industrial to domestic tariffs be largest in metropolitan cities, where industrial customers pay more than eight times as much as domestic customers in 20% of cases (see .igure 5). In summary, Indian water tariffs tend to be unfair to industrial customers, as well as measured residential users, and small consumers without meters. Unmeasured domestic customers with high water use are those that tend to do best out of the tariff system. Affordability According to the principle of affordability, water tariffs Note: Ratio based on a normalized consumption of 100 cubic meters per month. should ensure that low income households are Source: Adapted from NIUA, 2002 metering and provides incentives for measured With low tariffs and low effective meter customers to try and tamper with the meters. coverage, there are no real economic As regards the balance between domestic and incentives for Indian consumers to industrial customers, the latter tend to pay at least twice as much as the former for the same service. This is doubly economize on water use. unfair when one considers that industrial customers are often cheaper to serve given that they take their supplies from the larger trunk mains, and hence do not necessitate any of the costs associated with the tertiary distribution comfortably able to pay for a subsistence level of water consumption. The World Health Organization has developed a reference point of 5% for the proportion of the family budget that can reasonably be spent on meeting subsistence water needs. The definition of subsistence consumption varies considerably around the world, with values ranging from 5 to 20 cubic meters rojectP per month. According to the Planning Commission of India, in .IRE-D 1999-2000, 23.6% of the population in urban India lived under the official poverty line of Rs. 454 (US$ 9) per 7 ndo-USAIDI capita per month. To assess affordability, we express by the cost of subsistence consumption in the 5 to 20 cubic Picture meters per month range as a percentage of the monthly W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A A SCORECARD .OR INDIA Table 2: Scorecard for water tariffs in India Criterion Evaluation Comments Cost recovery Poor Average prices are about an order of magnitude below likely economic costs of service provision. Economic efficiency Poor Nearly half of all customers lack meters, while those with meters face prices substantially below the incremental cost of water supply. Nonetheless, wastage of water is circumscribed by physical rationing in many cities. .airness Poor Tariff structures are generally unfair towards industrial customers and metered customers. Affordability Good Given that a subsistence consumption of 10 cubic meters per month absorbs only between 1.1% and 2.2% of the budget of a family living on the poverty line. budget of a family of five living on the poverty line. Table 2 provides the final scorecard for water tariffs This comes to between 0.3-1.2% of the budget for a in urban India, and illustrates that affordability has been family with metered service, and 2% of the budget for the overriding concern in the design of water tariff a family with unmetered service. These percentages lie structures in India. However, unfortunately, the well below the World Health Organization affordability achievement of affordability has come at major expense threshold of 5%. in terms of sacrificing cost recovery, economic Connection charges at their current levels of around efficiency and fairness. This in turn has put Indian water Rs.1,000 (US$ 20) may represent an economic barrier utilities in a precarious financial position jeopardizing to the poorest of households, unless the possibility of their ability to sustain service levels. paying in installments is provided. This becomes even more critical in the 10% of cities which levy connection What About the Effectiveness of charges close to cost recovery levels of around Rs.7,500 Indian Subsidies? (US$ 150). The strong emphasis on affordability in Indian water In summary, Indian water tariffs are extremely tariff design, as well as the very poor performance in affordable, even for families living in extreme poverty. terms of cost recovery, indicate that subsidies lie at the Indeed, this is the only one of the original four policy heart of the Indian water sector. Indeed, state transfers objectives that they unquestionably meet in full. to the water sector in India have been estimated at Connection charges may however present an Rs. 5,470.8 crore (US$ 1.1 billion) per year3, accounting 8 affordability problem, particularly in some cities. for 4% of all government subsidies in India and 3Srivastava, D.K. and Sen, T.K. (1997), Government Subsidies in India, National Institute of Public .inance and Policy, New Delhi. W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A equivalent to 0.5% of GDP. About 98% of this subsidy comes from State rather than Central budgets; while .igure 6: Affordability of higher water tariffs charges contribute to a mere 3% of the overall costs of service provision in both urban and rural areas. Clearly, subsidies to the water sector represent a substantial drain on the public purse. It is therefore particularly important to understand to what extent the Indian system of water subsidies is effective. .ollowing the framework developed in an earlier paper, a number of important questions can be posed. Do subsidies respond to a genuine need? Are they accurately targeted towards the poor? Are they costly to administer? Do they create perverse incentives? Source: Adapted from National Sample Survey Organization (2000), Genuine need Household Consumer Expenditure in India 1999-2000: Key Results from the NSS 55th Round, Ministry of Statistics and Programme Subsidies are genuinely needed when families would Implementation, Government of India, New Delhi have to spend an unreasonable proportion of their income to meet their basic needs for water. Although it is difficult to say objectively what an unreasonable Applying this principle to India suggests that even a amount of money to spend on water is, as noted above, typical five-member family living under the poverty line the World Health Organization has for many years used with a per capita monthly budget of Rs. 350 (US$ 7) 5% of family income as a benchmark level for could afford to pay up to Rs. 6 (US$ 0.12) per cubic affordability. meter for a subsistence block of 10 cubic meters per month, which is approximately four times the current typical volumetric charge of Rs. 1-2 (US$ 0.02-0.04) per cubic meter. Although such a tariff represents a substantial increase over current levels, it still falls short of the levels that appear to be required to recover current operating and maintenance costs (around Rs. 15 or US$ 0.30 per cubic meter). However, as noted above, these rojectP costs incorporate substantial inefficiencies and could potentially be significantly reduced under better .IRE-D management. In order to provide a sense of how rapidly tariff 9 ndo-USAIDI increases towards full economic costs become by unaffordable, .igure 6 plots the proportion of the Picture population who could afford to pay for a subsistence W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A A SCORECARD .OR INDIA even at current low levels, connection charges would only be affordable if poor families were given the option of paying them by installments over a period of at least a year. If connection charges were to be raised to cost recovery levels of closer to Rs. 1,000 (US$ 20) much longer rojectP term credit lines would be needed. .IRE-D Accurate targeting With current water tariff levels in India, just about all ndo-USAIDI by customers pay much less than the full economic cost of the service; irrespective of how much they consume, Picture whether they are residential or industrial, or whether they have private connections or use public standposts. level of consumption at different levels of the water In this broad sense, water subsidies in India are not tariff, and using different assumptions about the targeted at all. subsistence threshold for water consumption, the WHO However, the tariff structures used by Indian utilities affordability criterion of 5% of income is used. The do aim to provide higher subsidies to some customers graph shows that tariffs up to Rs.10 (US$ 0.20) per cubic than to others, and to that limited extent some degree meter range are affordable for the vast majority of of targeting does take place. Users of public standposts households, when the subsistence threshold is set at receive the service free of charge, while residential 10 cubic meters per month. customers with private connections pay a small price In summary, while tariffs could probably be raised for the service, and industrial customers a higher price. to four times their current levels without seriously Moreover, in some cities, IBTs are used to provide higher damaging affordability for the poorest, raising them subsidy rates to low-volume consumers who are much beyond Rs.10 per cubic meter would be difficult assumed to be the poor. from a social perspective. Hence, although subsidies .igure 7: How effective is self-selection into could be significantly reduced relative to current levels, public standposts? there appears to be a genuine ongoing need to subsidize the costs of water service provision. Assessing the affordability of connection charges is more difficult given that they are one-time payments that may often be paid out of accumulated savings. Nonetheless, the poorest households typically lack both significant financial reserves and access to affordable 10 credit. In this sense, even current connection charges of around Rs.1,000 (US$ 20), would be unaffordable to poor households since, as a one-time payment they would represent around three quarters of monthly income. Hence, Source: National Sample Survey (50th Round), 1993-94 W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A Table 3: Distribution of subsidy across customer classes in Hyderabad Industrial Residential Public Public connection connection tankers standpost Daily water consumption (m3) 7.69 0.57 0.05 0.05 Average tariff (Rs./m3) 14.5 7.1 0.0 0.0 Average cost (Rs./m3) 16.7 16.7 12.9 42.0 Subsidy rate (%) 13 57 100 100 Annual subsidy (Rs./conn/yr) 6,283 2,028 767 235 Source: Own calculations based on data from HMWSSB. By providing a zero cost, low quality of service, subsidies to the water utility, and represent a serious public standposts offer a choice that is only likely to be error of exclusion. attractive to lower income families. In this sense, they .inally, it is paradoxical to note that even though there implicitly target subsidy resources by encouraging the is an effort to apply higher subsidy rates to those services poor to voluntarily select the more subsidized service. most likely to be used by the poor, in practice the absolute .igure 7 compares the proportion of those using private value of the subsidy received by each of these customer and public tap services that live below the poverty line. groups is inversely proportional to the subsidy rate. This The results show that those using public taps (58%) are point can be illustrated with data from the Hyderabad almost twice as likely to be poor as those using private Metropolitan Water Board (see Table 3). The data show taps (29%). that although industrial consumers have the lowest subsidy The implication is that self-selection works to some rate on their tariffs, their consumption is so much higher degree, but that even among those using public taps than that of any of the other customer groups that they only three out of five are poor. This may simply reflect end up receiving a much higher absolute value of subsidy the lack of availability of capital for the utility to expand (Rs. 6,283 or around US$134 per year). Conversely, private connections into neighborhoods where people would be able to afford them, forcing some non-poor households to make use of public taps at least for drinking water purposes. These statistics also show that a substantial proportion of the users of both services are non-poor so that any indiscriminate subsidy applied to either of them will end-up leaking away to unintended beneficiaries. rojectP These errors of inclusion are 42% for public standposts .IRE-D and 71% for private taps. Moreover, 40% of the urban 11 poor in India do not use either private or public taps, ndo-USAIDI but rely on tubewells, handpumps and surface water by sources. These people do not benefit at all from Picture W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A A SCORECARD .OR INDIA customers relying on public standposts consume such a small amount of water thateven though it is provided free of chargethe overall value of the subsidy they receive is very modest (Rs. 235 or around US$ 5 per year). In summary, there is little targeting of subsidies in Indian water tariffs given that just about all consumers rojectP pay less than full cost. This means that more than 70% .IRE-D of those benefiting from subsidies channeled towards private connections are not poor, while 40% of the ndo-USAIDI poor who do not use any public water services are by excluded altogether. Public taps do a reasonable job of Picture channeling subsidies towards the poor, however because they deliver such small amounts of water the from time to time, although this does not always happen absolute value of these subsidies is very small compared in a timely fashion. to those enjoyed by private connections. These targeting failures suggest that the overall subsidy cost to the state Avoidance of perverse incentives The high levels of subsidy in the Indian water sector lead to a variety of behavioral distortions such as More than 70% of those benefiting from water wastage, while the imbalance of industrial and domestic tariffs may encourage some business users subsidies channeled towards private to disconnect from the public system and rely on connections are not poor, while 40% of the private wells instead. However, perhaps the most poor who do not use any public water serious distortion that has arisen in the water sector services are excluded altogether. in India is the need for water consumers to develop coping mechanisms to deal with the intermittent nature of supply. The economic burden of these could be significantly reduced if subsidies were more coping costs proves to be quite considerable. effectively targeted towards the poor. Owing to the precarious financial situation of many water utilities in India, service quality has Low administrative cost suffered seriously, and in many cities service is only Since there is no major system of subsidy targeting in available for a few hours each day, or even every India, there are few if any associated administrative other day. On the one hand, households with private costs. The exception may be in a few cities that continue connections are often forced to construct storage 12 to use Annual Rateable Value (ARV) as a basis for tanks and/or private boreholes to tide them over unmeasured charging, since the corresponding property during service interruptions. On the other hand, valuations shouldat least in principlebe updated households relying on public standposts often have W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A Table 4: Scorecard for water subsidies in India Criterion Evaluation Comments Genuine Good Tariffs beyond Rs.10 per cubic meter would be genuinely unaffordable for a need substantial proportion of the Indian population; however current tariff levels could easily be increased by a factor of four without affecting the affordability of the service for the poorest households. Accurate Poor All water users receive subsidies. There is some success with self-selection of targeting the poor into public standposts; however although this service is more highly subsidized the absolute value of the subsidy is small. Low Good Given that there is hardly any targeting of subsidies, the administrative costs administrative are necessarily minimal. cost Avoidance of Poor The subsidy system discourages water conservation, encourages large industrial perverse customers to self-supply, and leads to the phenomenon of coping costs incentives through which many households end up paying much more than they do in utility charges. to queue up for long periods to obtain water when it expenditure, and are hence more difficult to value becomes available. in economic terms. These coping costs can be very considerable, In summary, the precarious financial situation of both in absolute terms and relative to the charges water utilities in India has led to declining quality of that customers pay to their water utilities. Two recent service, which imposes substantial indirect coping studies for the cities of Delhi and Dehradun found costs on consumers. These typically exceed the that average coping costs for households with private financial charges that consumers pay to utilities. connections work out at Rs.3.5 (US$ 0.07) per cubic Table 4 provides the final scorecard for water meter, compared with utility charges of around Re.1 subsidies in India, and illustrates that although there is per cubic meter in Delhi and Rs.3 per cubic meter a genuine need for water service subsidies in India, in Dehradun4. These studies also show that the current subsidy levels are significantly higher than they coping costs per cubic meter faced by users of public really need to be to keep services affordable for the standposts appear to be much higher than those faced poor. Moreover, owing to the almost complete absence by those with private connections. However, the of targeting, there is tremendous wastage of subsidy former are more likely to take the form of time wasted resources, most of which are captured by non-poor queuing at standposts as opposed to monetary households. 13 4.or further details see: (a) Choe, K., Varley, R.C.G., and Biljlani, H.U. (1996) Coping with Intermittent Water Supply: Problems and Prospects, Activity Report No. 26, Environmental Health Project, U.S. Agency for International Development, Washington, D.C.; (b) Zerah, M.H. (2000) Water: Unreliable Supply in Delhi, Manohar, Centre de Sciences Humaines, New Delhi, India. W A T E R T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A A SCORECARD .OR INDIA Prepared by: Usha P. Raghupati of the National Institute of Urban Affairs, New Delhi and Vivien .oster of the World Bank, Washington Conclusions Series Editor: Clarissa Brocklehurst Indian water tariffs and subsidies, unfortunately, do This series of papers was prepared as part of the Capacity Building not score very highly against a number of standard and Learning initiative undertaken by the South Asia Energy and performance criteria. Indian water tariffs only meet one Infrastructure Unit of the World Bank in collaboration with the out of four important policy objectives: they are Government of India, the World Bank Institute and the Water extremely affordable. However, this comes at the major and Sanitation Program, supported by a grant from the Public- expense of sacrificing cost recovery, economic Private Infrastructure Advisory .acility (PPIA.), a multi-donor efficiency and fairness. technical assistance facility aimed at helping developing countries Indian water subsidies do respond to a genuine need. improve the quality of their infrastructure through private sector Given current income levels, water tariffs much beyond involvement (for more information see http://www.ppiaf.org). The Rs.10 (US$0.20) per cubic meter would make the service initiative is designed to support the implementation of sector unaffordable for a significant proportion of the population. reforms and public- private partnerships in the provision and However, given that under current inefficient management financing of water supply and sanitation services in India. operating and maintenance costs stand at around Rs.15 December 2002 (US$0.30) per cubic meter, it may be possible to close Task Manager: Midori Makino the gap between affordable tariffs and cost recovery Design and Production Coordinator: Vandana Mehra tariffs by improving utility performance. Thanks to: Vivek Srivastava and Deepak Sanan Notwithstanding, tariffs that cover full capital costs would clearly lie beyond the reach of a substantial Designed by: Roots Advertising Services Pvt. Ltd. majority of households, indicating that capital subsidies Printed by: PS Press Services Pvt. Ltd. are likely to remain an important feature of the sector. In spite of this, current subsidy levels are significantly higher than they need to be, given that even the poorest households could afford to meet their subsistence needs with tariffs four times higher than current levels. Moreover, the absence of targeting mechanisms means that subsidy resources are wasted on households that could afford to pay. PPIAF Hence, if tariffs could be raised closer to the level 1818 H Street, N.W. of operating and maintenance costs and some kind of Washington, D.C. 20433 targeting mechanism be introduced, significant Phone: +1(202) 458-5588 performance improvements could be achieved in terms Fax: +1(202) 522-7466 of cost recovery, economic efficiency and fairness, without Email: info@ppiaf.org seriously jeopardizing affordability. .urthermore, as a Website: www.ppiaf.org result, the state could significantly reduce its current subsidy budget, and the financial position of water utilities could be strengthened allowing them to reduce the burden of coping costs and provide better service for all. Water and Sanitation Program References 1818 H Street, N.W. National Sample Survey Organization, Ministry of Washington, D.C. 20433 Statistics & Programme Implementation, Government Phone: +1(202) 473-9785 Fax: +1(202) 522-3313, 522-3228 14 of India, 2000, Household Consumer Expenditure in India 1999-2000: Key Results Email: info@wsp.org National Institute of Urban Affairs (NIUA), 2002, Website: www.wsp.org Status of Water Supply, Sanitation and Solid Waste Management in Urban India, NIUA, New Delhi. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the Public-Private Infrastructure Advisory .acility (PPIA.) or to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Neither PPIA. nor the World Bank guarantees the accuracy of the data included in this publication or accepts responsibility for any consequence of their use. The boundaries, colors, denominations, W A T E R and other information shown on any map in this report do not imply on the part of PPIA. or the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. T A R I . . S A N D S U B S I D I E S I N S O U T H A S I A