Why inducting private sector into operation and maintenance of Delhi’s water supply system is a positive step

October 3, 2020 4:33 AM

One need only look at the national capital’s experience with power distribution privatisation to see the potential of allowing private players in Water supply

The extent of power subsidies in Delhi now, as compared to that in 2002, also points toward fiscal and financial sustainability.The decision to privatize the DISCOMs in Union Territories was a significant step in this direction that is expected to pave way for more positive reforms in future.

By Kumar V Pratap

Last week, the Delhi government decided to induct the private sector into operation and maintenance of the water supply system in Delhi. This is a very positive and long overdue step to improve service delivery of a merit good. India has non-revenue water (NRW, water supply for which the water utility does not receive any revenues) of about 50%, which is unsustainable for the financial viability and efficiency of any large infrastructure system. With the induction of the private sector in water supply, it is expected that the success that has been achieved in the reduction of Aggregate Technical and Commercial (AT&C) losses (an equivalent concept to NRW) in the power sector since 2002 in Delhi would be replicated in the water supply sector. The success of the power distribution reforms in Delhi compares with the best in the world, and it is high time that this achievement is replicated nation-wide and across infrastructure sectors, including water supply.

It is generally reckoned that among the traditional infrastructure sectors, power and water distribution are the most difficult for public-private partnerships (PPPs). These sectors are under-priced and there is a retail interface, which implies that any effort to introduce private participation in these sectors is politically sensitive. However, the high level of AT&C losses and NRW are an opportunity (instead of a threat), in the sense that bringing them to efficient levels (single digits) would imply more money going into the revenue streams of the providers, without having to raise the level of retail tariffs, making the initiative politically palatable, while also providing for the necessary expenditures needed for efficient provisioning of these services.

Let me explain how the unsung power distribution PPP in Delhi compares with the best in the world. Before induction of the private sector in Delhi in 2002, blackouts were common (6-7 hours/day), there were high AT&C losses (more than 50%) because of theft, overdues and technical loss; there was average cost under-recovery of about Rs 2 per unit of power, aggregating to about Rs 1,142 crore of losses in 2002, with this loss increasing at about 6% per annum.

Now, the AT&C losses are below 10% in Delhi, and the reliability of power, unscheduled outages and overall consumer satisfaction have also improved significantly. Normally, in the company form of organisation, with separation of ownership and management, it should not matter whether the ownership is public or private, as long as the management is professional. However, as apparent from numerous successful privatisation examples, ownership matters. It is likely that the pathetic scenario as outlined in the previous paragraph would have persisted, had Delhi’s power distribution continued to be with the public sector.

The achievements of Delhi seem superior to even those found internationally. Katharina Gassner, et al (2007), using a large database of 160 electricity utilities that experienced private participation between the beginning of the 1990s and 2002 and 90 state-owned electricity enterprises across the developing world, find that private participation is associated with 11% reduction in distribution losses (in the case of Delhi, there has been a 40 percentage point reduction in AT&C losses), and 45% increase in bill collection rates (in the case of Delhi, the collection efficiency has already reached about 100%).

The extent of power subsidies in Delhi now, as compared to that in 2002, also points toward fiscal and financial sustainability. There is currently 100% subsidy to Delhi consumers who consume upto 200 units per month, while the subsidy is 50% for consumers who consume upto 400 units (power subsidy was Rs 2,250 crore in 2019-20, with about a fourth of the Delhi population receiving this subsidy). Because of this, while the subsidy is going up in absolute terms in recent times, it is low as a percent of budget expenditure—power subsidy has come down from 8.6% of budgetary expenditure in 2002 to 3.2% in 2019.

The water sector of Delhi would gain considerably after introduction of PPP in the sector. Manila Water Company (MWC) is one of the most celebrated stories in the water sector in developing countries and provides hope that successful PPPs can be implemented in this difficult sector, provided we get the structuring right and there is adequate political support. Just to recount the MWC experience: Private concessionaires were chosen through competitive bidding in 1997 in Manila. Given the under-recovery of costs through user charges, the bidding parameter that was chosen was ‘lowest initial tariff’. Concession period was fairly long, at 25 years. Targets for improvement in service coverage, water quality, service quality and reduction in NRW were specified in the contract. After the induction of MWC, 24-hour water supply coverage has increased from 26% in 1997 to 99% now; from delivering only 440 million litres to 3.1 million consumers per day in 1997, Manila Water has reduced water losses to deliver over 1.3 billion litres of water daily to 6.8 million residents, of which around 1.8 million people are from marginalised communities who have been given access to clean and affordable water.

While tariffs rose following the induction of the private partner, the coverage of the population also increased, following which the resistance to any increase in water tariffs went down. This is a very important point that should be re-emphasised. Because of the financial condition of water utilities, large sections of the population (mainly the poor) are rationed out from piped water supply and end-up paying much more for supply from water tankers and standposts. The private sector has enough incentives to reduce NRW by increasing water supply coverage to the under-provided sections of the population for mutual benefits—the really poor get access to cheaper and better water supply, while the private operator gains through increased revenues from reduced NRW. However, service improvements through induction of the private sector in water distribution would not be easy and would take many years of persistent efforts along with political support for the initiative to bear fruit.

The author is Former Joint Secretary (Infrastructure Policy and Finance), MoF and currently Joint Secretary, Ministry of Home Affairs. Views are personal

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