Cautious corporatisation

The ongoing process of corporatisation of water supply in Bangalore has important implications.

WITH reforms well under way in the energy sector in the country, it is now the turn of urban water supply. Bangalore is the first city to begin the corporatisation process for its water utility, the Bangalore Water Supply and Sewerage Board (BWSSB). Its sister utility for the rest of the State, the Karnataka Urban Water Supply and Drainage Board (KUWSDB), will follow suit. The corporatisation of these utilities, however, is only one part of a comprehensive reform of the water sector planned by the Department of Urban Development of the Government of Karnataka. The State government's draft water policy envisages, amongst other aspects of reform, a significant role to be played by the private sector, especially in the distribution sector, through O&M (operation and maintenance) contracts. Given the political sensitivity attached to an issue like water distribution, and the lessons learnt from the privatisation of the energy sector, the State government is moving cautiously on the corporatisation of the two major water utilities.

The corporatisation of the BWSSB as a showcase project was recommended as early as January 1999 by the Special Subject Group on Infrastructure formed by the Prime Minister's Council on Trade and Industry in its report on Urban Water and Sewerage. It is not surprising that the BWSSB should have been chosen to lead the way. As is the case with public sector disinvestment, in the water sector too the best of the functioning boards has been chosen for corporatisation, or 'privatisation' - which is how the Group on Infrastructure describes the proposal. The BWSSB has an excellent track record and is one of the better-managed water boards in the country. Set up as an independent board in 1964, it services a population of six million - which figure is projected to reach 7.3 million. It has only 3,000 employees on its rolls (as against over 7,000 in the urban water utilities in Chennai and Hyderabad). The BWSSB scores over other boards on two efficiency parameters. First, it has a relatively low ratio of 10 employees per 1,000 connections, half that of other water boards in the country. Second, its operating ratio of 1:1 to 1:2 is next only to Mumbai which is just below 1 (an operating ratio of less than 1 indicates a high revenue collection).

The Group on Infrastructure in its report made several recommendations on how private sector participation in the water sector could be ensured, an urgent requirement in its view as the water supply boards did not have the financial resources or the managerial and technical knowhow required to improve the water distribution system. The Group suggested that concessional contracts be used to privatise the BWSSB's water distribution and sanitation services and that an independent regulatory authority be formed to regulate the operation of the privatised utility and set targets for reduction in water losses and improvement in revenue collections.

A comprehensive water policy, of which the corporatisation of the two water utilities is only a part, has been on the drawing board since the report of the Group on Infrastructure in 1999 was released. "The draft water policy addresses three or four key issues," S. Krishna Kumar, Principal Secretary, Department of Urban Affairs, told Frontline. To begin with, the strategy that will guide urban water planning will be a proactive one, where urban expansion must follow rather than precede provisioning. "In the past we would provide water to urban centres as they grew. Today we can offer incentives for the development of new layouts in proximity to water sources through, say, a system of differential pricing," Krishna Kumar said.

The second point of emphasis in the water policy relates to bringing down the UAFW (unaccounted for water, which is the water pumped from the supply source but which does not reach the system) and the non-revenue water (water which is not billed). The third issue relates to the need to revamp and maintain the distribution network. There is, finally, the issue of conjunctive use. As surface water depletes, measures such as ground water harvesting can be employed to augment water supply. There is also the need to treat wastewater for reuse, particularly for industrial use and commercial agriculture. Such efforts, hitherto undertaken by individuals or non-governmental organisations, must be policy driven if it is to make a real difference.

A major new thrust of the policy will be in bringing in institutional changes that will create an enabling environment for private sector participation, which will be first invited for O&M contracts. The letter and spirit of the 74th Amendment is sought to be worked into the policy. Thus, local bodies will continue to have control over the supply and distribution of water. The new policy envisages the creation of a number of independent regional utilities with which local bodies can enter into performance contracts. "During Phase 1 we will retain control of the Board or the Government of Karnataka over these utilities. This will be a transition phase of managed competition, before the next phase when these regional utilities will be privatised," said Krishna Kumar.

Water management is today a technologically specialised field, and the policy envisages that local bodies could enter into performance contracts with regional utilities to handle the supply of water in bulk, do retail distribution, maintain the distribution network, take care of billings and collections and so on. Private companies in search of high returns are less likely to enter the water sector in the interior parts of the State which may not have the capacity to pay. This is one reason why the government is intent on setting up a two-stage process of privatisation of regional utilities.

Recently, the World Bank has committed to fund of $150 million for capacity building in the water sector for 13 towns in Karnataka. A part of this fund will go towards awarding management contracts with the new regional utilities through international bids. In addition, the Asian Development Bank has given the Karnataka government a grant of $175 million to develop the water sector in coastal towns. The changes envisaged in the water policy would require substantial amendment of the KUWSBD Act, the BWSSB Act, 1964, and the Karnataka Municipalities Act. The corporatisation process of the two boards, while recommended in the draft water policy, is taking shape on a parallel track.

If the changes recommended by the new water policy could as well take shape under the efficiently run board, what is the rationale for corporatisation? Is it a process that will pave the way for later privatisation? Government officials do not agree. "Corporatisation will help bring in better technologies, more capital money and the freedom to revise tariffs under the scrutiny of a regulator," M.N. Tippeswamy, Chief Engineer, Corporate Planning of the BWSSB, said. The various boards are excellent engineering organisations, but in the new circumstances they need, in addition, to develop managerial and marketing strengths, said Krishna Kumar. The BWSSB has entered into an agreement with the Australian Agency for International Development (AusAID) to prepare a 25-year water supply and sewerage master plan for Bangalore. The Australian government has given a grant of $4 million for the project, which will also address issues arising from the corporatisation proposal.

Water being a fundamental need of life, the privatisation of this sector involves issues that are different from the privatisation of the energy or telecommunications sectors. The state or a strong regulatory body must ensure its delivery to the poor and disadvantaged sections. The poor already pay a disproportionately high price for water, and a high water tariff imposed by private companies will push the poor out of a protected water system. So the service obligation in the water sector has implications for tariffs and subsidies. Secondly, the health and sanitation aspects of water supply have to be regulated carefully and cannot be left entirely to private operators. Britain, which in 1989 went in for the outright privatisation of its water sector, had to pay a price when water providers reneged on their commitments to provide potable water. In the case of water, unlike energy or telecom, the costs lie in transmission and distribution and not in the cost of initial production or storage.

There are many levels at which privatisation can enter the water sector, from very low risk involvement to the outright sale of assets. The simplest form of private sector participation is the service contract whereby the public utility retains overall responsibility for operation and maintenance of the system, except for the specific, limited-scope services that are contracted out or out-sourced. Management contracts are more comprehensive where a private company takes responsibility for O&M. Payments here are usually proportional to physical parameters, which builds in an incentive for increasing productivity. One of the successful experiments in management contracts has taken place in Gaza town, where the Palestine Liberation Organisation government awarded a four-year management contract in mid-1996 to LEKA, a private contractor, to improve the availability and the quality of water and waste water treatment, better revenue collection and customer service. The impact of this reform was dramatic on all performance indicators in an area that prior to 1995 was water deficient.

There is also a range of privatisation models in which partial or full ownership is transferred, temporarily or permanently, to the private sector. The BOOT (build-own-operate-transfer) and its options BOT (build-operate-transfer) and BOO (Build-own-operate), joint ownership, and outright sale are some of the options.

In June 1997, the Karnataka government decided that it would invite private sector participation on a BOOT basis for the implementation of the Cauvery Water Supply Scheme Stage 1V Phase II and Stage V for a total quantity of 500 MLD of water. The total project size was estimated at around Rs.1,500 crores then. The BWSSB was asked to invite global tenders. In a controversial move, the J.H. Patel government signed a memorandum of understanding with the Malaysia-based firm Biwater. Not unlike the model for private participation in the energy sector, the BWSSB would have had to lift all the water supplied by Biwater at a fixed tariff with a built-in rate of return. In June 1998 Biwater had stipulated that the tariff would be Rs.26 a kilolitre. The latest tariff offered by Biwater is believed to be just under Rs.23 a kilolitre. The Board's current water tariff is between Rs.17 and Rs.18. The Congress(I), while in Opposition, raised stiff objections to the Biwater agreement in the State legislature on the grounds that it could land the State government in a Dabhol-like financial bind. When the S.M. Krishna government came to power, the MoU with Biwater went into cold storage. Biwater officials, however, made a presentation to the Chief Minister and a group of his Cabinet Ministers recently in which they offered a fresh tariff structure which is now under consideration by a technical group.

Major reforms are thus in the offing in the water sector in the State. Howevermuch government officials may deny it, there is little doubt that the new water policy will provide the overall framework and create an environment for the entry of the private sector into the water sector. While there is a strong argument for bringing in the technologies that are available in the private sector, the social impact of privatisation of water on water users will be determined by the specificities of the ground situation in the State. However, there is a large international experience in water privatisation, particularly the impact of water reform on the poor, which could surely provide valuable lessons.