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Key to well performing utilities is better governance

New Delhi : Globally water supply and sanitation (WSS) services have commonly been provided by state-owned or public utilities. Factors like weak policy and institutional frameworks, inadequate capacities, absence or weak political will, weak performance incentives, neglect of consumer preferences due to lack of transparency and accountability, lower willingness to pay cost recovery tariffs and insufficient funding for maintenance, leading to deterioration of assets and squandering of financial resources lead to poor performance of the utilities.

For many of the past decades, there was a wide optimism that the private sector would resolve much of the performance problems of the utilities and mobilize scares financing to sustain growth and expand coverage. While private sector involvement has still increased, it has fallen short of meeting the expectations, which is evident by the fact that many private water utilities around the world were handed over to the public sector after the completion of the contract period.

In India too, the response to performance improvement is often seen as an external intervention required. Solutions such as developing PPP models or providing more grant funding are often explored to address the problem of performance improvement without addressing the governance issues.

In absence of serious attempt to improve governance and internal drive for performance improvement, the external interventions planned have not been effective.

The expectation that private sector intervention will lead to better performance is often misplaced. The experience of successful private sector intervention in other infrastructure sectors like telecom cannot be replicated in the WSS sector. The private sector investments in the water sector are fraught with risks as the credit-worthiness of the public agency is questionable. In the telecom sector returns on private sector investments in telecom were not backed by an unworthy public agency but a willing individual customer.

Also, the WSS sector is different for several other reasons. The sector performance needs to be seen as a good example of government failure.

Whether private sector participation can be a solution to address government failure in a sector like WSS which has characteristics of natural monopolies is something that needs to be answered.

The invention of wireless telephony made telecom lose its natural monopoly characteristics. Even the Railways is a natural monopoly but there are alternative modes of transportation to it. One may say electricity distribution is natural monopoly in a way.

But, water and electricity differ in a fundamental way. In water supply, there is no complete breakdown of service. Service levels deteriorate but supply continues. Consumers adjust to deteriorating service levels with collateral damage as is visible in outbreak of diseases and illness in consumers though water-borne diseases.

But, in electricity there can be a complete breakdown and hence government machinery reacts to rectify the problem even if it happens in a sub-optimum way.

So, what does this mean for private sector participation in the WSS sector?

Today, most water utilities lack the capacity to provide services efficiently and effectively. Several reasons can be the cause. The years of neglect and inadequate accountability would have blunted the utility managers’ ability to manage the system.

Further, the recruitment freeze in most government agencies would not have allowed the skills and knowledge transfer from the experienced staff to the junior technical personnel. The problem of over-staffing may be widely prevalent at the lower levels of un-skilled or administrative positions.

There is an urgent need to strengthen the utilities with recruitment of skilled personnel. If provided with the right incentives, the private sector is likely to build capacity at a faster pace to improve services.

This has been seen in telecom, power, roads and airport sector today. These sectors were the monopoly of the public sector till some years ago.

A well governed and efficient water utility is at the core of the reform process. The roadmap for utility reform needs to break the vicious circle of unaccountable investments, low recovery and poor levels of service.

The need for responsible governance and financial viability has been under-emphasised and neglected in the past. Global experience suggests that some public utilities have been able to improve their performance. This has been possible as the governments were able to address the existing informal and the formal bottlenecks that impact the WSS service delivery in an integrated manner by achieving the appropriate and optimal mix of incentives - policy, institutional, regulatory and financial.

The starting point on the road to being a well performing utility is knowing one’s inefficiencies better. It is our experience that a well-performing water supply utility is one which can measure its inefficiency against the right benchmarks most accurately.

Instead of focusing primarily on a few large, important, and usually politically controversial steps, there is a need to take a hundred small steps in the same direction that will collectively take the sector very far in terms of performance. We understand that the process of making the utility measure its inefficiency will herald a process that can be figuratively said to be taking “a hundred small steps” towards making the sector perform better.

These defined steps will allow the utility to understand its baseline performance in a reliable manner. It is based on this understanding that a credible performance improvement plan can be structured. These steps include understanding the consumer base; level of water losses and causes for the same; and the cost of providing services.

The need of the hour is better management; the public sector can leverage private sector expertise in improving the sector performance. Through a performance contract with a built-in incentive structure, the public sector can make the private sector accountable for service delivery and an improved sector performance.

However, the road to a well performing sector will be a better governed utility, without which, private sector efforts or internal efforts of the utility will not yield any significant outcomes. It is on the back of a well-designed public sector reform package that private sector can supplement the efforts of the public agencies to improve performance.

Abhay Kantak is Director – Urban, CRISIL Infrastructure Advisory.

(Disclaimer: India Water Review does not take any responsibility for the views expressed in the article. The article published also does not in anyway reflect the opinion of India Water Review.)

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