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Improving Water Supply and Sanitation Services for the Urban Poor in India

Section 5

Strengthen Capacity, Autonomy, and Accountability of Service Providers and Provide Incentives to Serve the Poor

The roles and responsibilities of policymakers, service providers, governance bodies, and regulators need to be clearly defined and separated to ensure the autonomy and accountability of service providers.

Obstacles

• Service providers lack the autonomy as well as financial and human resources, and incentives required, to provide services to the urban poor.
• Municipalities and utilities are not held accountable for the provision of water supply and sanitation services.
• The services provided by small private service providers are not recognized, encouraged, and regulated.

The poor performance of water supply and sanitation (WSS) services in India is due in large part to inappropriate institutional frameworks, lack of regulatory mechanisms, inadequate financial resources, absence of appropriate attitudes and skills, and a lack of explicit directives and incentives to serve the poor. In fact, there are no fully autonomous water and sanitation utilities in Indian cities and few, if any, permanent monitoring and regulatory mechanisms. A few metropolitan cities, such as Delhi, Chennai, Hyderabad, and Bengaluru, have WSS boards with limited functional autonomy. In Kolkata and Mumbai, dedicated departments of the municipal corporations manage WSS operations. In the remaining cities, WSS services are either operated by a state-level specialist agency with limited autonomy, or are managed jointly with other services by a municipal department.12

Until recently, the emphasis in India has been on creating infrastructure rather than promoting strong institutions, financial viability, efficiency, service quality, customer relations, and specifically targeting the poor. Reflecting this, training programs focus primarily on technical and engineering skills and only rarely address commercial, managerial, and strategic aspects of WSS services, let alone strategies for serving the poor.13

In the absence of efficient autonomous service providers, the distinction between the utility and the municipal administration is blurred; managers of the services do not control the resources required to provide the services and cannot be held accountable. There is a lack of clarity regarding the roles of state governments, state government utilities, municipal bodies, community organizations, and private players. In such cases, targets for service quality are typically not established or monitored. Tariffs rarely cover costs and, as a result, financial viability and sustainability are undermined. Therefore, many urban utilities fail to provide satisfactory service to a large part of the population—particularly the poor.

In contrast to the prevailing conditions, the Jawaharlal Nehru National Urban Renewal Mission’s mission statement emphasizes the importance of improving the efficiency and accountability of service providers and introducing institutional models that enhance the viability of services.

Small private service providers (SPSPs) are active throughout India—filling in part of the large gap between demand and the formal utilities’ ability to provide services. Since, in most places, formal utilities will be unable to satisfy the
demand of 100 percent of urban households for the foreseeable future, taking advantage of the services of the SPSPs should be an essential component of strategies to expand and improve services to the urban poor. Working with SPSPs will require innovative approaches to link them with formal utilities, introduce appropriate regulatory mechanisms, and devise strategies for eliminating illegal and abusive activities without driving the SPSPs out of business.

This section will focus primarily on the institutional, regulatory, and capacity issues. Mechanisms to address cost recovery are discussed in more detail in Section 6 because a strategy to improve cost recovery must also address the financial constraints and affordability issues that are specific to providing services to the poor.

12 India, Water Supply and Sanitation, Bridging the Gap between Infrastructure and Service. Op. cit., p. 9.
13 Ibid. pp. 20-21.

Separate and Clarify the Responsibilities of the Actors

The roles and responsibilities of policymakers, service providers, governance bodies, and regulators need to be clearly defined and separated to ensure the autonomy and accountability of service providers. In small towns with simple systems and limited human resources, it is not always realistic or meaningful to completely separate these roles. In large urban areas, and particularly in large countries with many large urban centers, it becomes even more important. In the latter context, clearly distinguishing among the following actors and their roles is recommended:

• Policymakers set overall service coverage and quality objectives, social policies, and cost-recovery policies. They should set guidelines, establish programs, and create institutions to promote and regulate the achievement of service objectives, financial viability, and efficiency. The respective roles and responsibilities of policymakers at the state and municipal levels need to be clear and complementary.
• Governance bodies (for instance, the boards of utilities) represent asset owners. They provide strategic direction, mobilize investment finance, approve annual budgets, and appoint the management team in a manner that is consistent with established policies. Governance decisions should be based on long-term strategic and financial criteria rather than short-term political interests.
• Service providers plan and supervise the development of infrastructure, and manage and operate services on the basis of technical and financial criteria to achieve the objectives set by policymakers and their governance bodies. To do this, they need adequate autonomy (for example, control overstaffing, financial resources, and procurement) and protection from political interference. Their financial accounts should be ring-fenced to promote financial viability and accountability.
• Utility regulators (or economic regulators) compensate for the lack of competition in monopoly services by ensuring that tariffs are reasonable, that is, commensurate with the cost and quality of services,
and enforcing service standards. A good regulatory system is predictable, credible, and transparent. The roles of state and municipal governments regarding regulation should be clear and any conflicts or overlapping responsibilities should be eliminated.
• Other specialized regulators usually enforce technical, labor, health, and environmental standards. Here, too, the respective roles of state and municipal governments should be clear.
• When two or more service providers carry out complementary functions—for example, when one entity is responsible for asset management and another for operations, or when a large utility provides bulk treated water and SPSPs manage distribution and commercial activities—their respective responsibilities need to be clearly delineated.

Institutional reforms should be tailored to fit the country and local context.
There is a great deal of literature and an accumulated body of experience on institutional reform of water supply and sanitation services, covering topics such as the creation of autonomous public companies, governance, contracting private operators, and creating regulatory frameworks.
However, while the basic principles— separation of roles, managerial autonomy and accountability, and financial viability—are universally desirable and applicable, there are no universal blueprints or ideal institutional models to achieve them. Care should be taken to tailor institutional reforms to each country and urban context.

The existence and potential role of SPSPs should be recognized and taken into account. Outsourcing the management of services to private operators or putting public operators under performance contracts have been operations from policymaking and regulation, as well as promoting financial and managerial autonomy.

The examples presented in Boxes 7, 8, and 9, and in the case studies and other listed resources, are intended to promote an understanding of some of the conditions that promote success and to stimulate the exploration of these and other models.

Box 7: Engaging Local Private Operators for Water Supply and Sanitation Services

Contracts with private operators, if well designed and appropriately monitored, can be an effective way to introduce autonomy and accountability. Until recently, tenders for private operators of water supply and sewerage services were aimed at large international firms, but in a number of countries tenders are increasingly aimed at local private operators, particularly in small towns with 10,000 to 50,000 residents. The experiences of Colombia and Paraguay (where, since 2001 and 2002, respectively, local firms have been engaged to operate water supply services in large urban or peri-urban areas with poor populations) may be relevant to large cities in India.

In Colombia, the poor performance of services operated by local governments led to the decision to engage private operators. In Paraguay, it was the high cost of subsidies required for investments and the failure of user associations to set tariffs high enough to repay loans for capital investments that led to the decision. In both countries local private operators have been engaged to construct or rehabilitate the infrastructure and operate the service for 15 to 20 years. In Colombia, most of the operators are companies with experience in providing other urban services, such as solid waste management. In Paraguay, large construction companies have sought the contracts but the government usually engages an experienced small local private operator (aguatero) to manage operations once construction is complete. In both countries, it is estimated that private operators are contributing about 20 percent of capital costs. The remainder is financed by grants from the national or local governments, using their own funds or the proceeds of World Bank loans. In Colombia, the municipal government contracts the private operator. In Paraguay, they are contracted by community- based user associations. In both cases, the national governments provide support to the local entities during the preparation and procurement process but the local entities assume full responsibility for day-to-day supervision of the operators. While competition for the contracts was somewhat limited in Colombia (only one or two bidders), it was strong in Paraguay (four to eight bidders). The contracts include very specific service targets that the operators are required to achieve. In both countries a national regulator specifies formulas and rules for setting tariffs.

The contracts were in their early stages at the time they were reviewed in 2005, but initial results were mostly positive. In both countries, previously unserved neighborhoods were getting connections. In Paraguay, the cost of government investment subsidies had been cut in half. One of the lessons learned in Paraguay was that user associations need intensive training and support initially to ensure proper monitoring and a healthy relationship with the operator. In addition, user associations that receive a small percentage of the operators’ tariff revenues are most likely to provide effective overseeing.

Source: Triche, Thelma, Sixto Requena, and Mukami Kariuki. December 2006. Engaging Local Private Operators in Water Supply and Sanitation Services, Initial Lessons from Experience in Cambodia, Colombia, Paraguay, the Philippines, and Uganda. World Bank, Water Supply and Sanitation Working Notes, No. 12.

Box 8: Successful Performance and Incentive Contracts in a Public Company: Uganda’s National Water and Sewerage Corporation

The National Water and Sewerage Corporation (NWSC) is an autonomous state company that provides water and sewerage services in the larger towns and cities of Uganda. Until 1998, in the absence of an effective accountability framework, the NWSC had made a number of poorly conceived investments. The company was very inefficient and financially unsustainable: its fixed assets were underutilized, 51 percent of water was unaccounted for, it was grossly overstaffed, and it was unable to service its debt. In 1998, a new general manager began to introduce performance incentive programs and a client-oriented culture with a strong emphasis on service quality. Substantial improvements resulted, but by 2000 it was clear that achieving financial sustainability would take several more years of effort. In 2000, the Government of Uganda and the NWSC agreed to a three-year performance contract under which the latter’s debt service obligations were suspended in return for continued performance improvements.

The performance contract specified the actions that the NWSC must take and the targets it was expected to meet with regard to a number of key operational and financial indicators. A Performance Contract Review Committee was established to monitor and report on the NWSC’s performance. In 2003, the Review Committee found that the NWSC had performed very well with regard to qualitative targets such as updating the asset registers, introducing incentive contracts with its area managers, and outsourcing noncore activities. It had met or come close to meeting quantitative targets for collection efficiency, connections, metering, and staff per 1,000 connections, but had fallen short with regard to financial performance, and remained unable to service debt. Nevertheless, the performance contract and the internal management initiatives that had been introduced had established a solid foundation for further improvements.

The government and the NWSC entered into a second performance contract for 2003–06, which introduced more meaningful financial indicators based on ratios rather than absolute results. In 2003, the NWSC also began to introduce an innovative strategy for improving its area managers’ accountability and autonomy. In January 2004, following an internal competitive bidding process in which all area managers were allowed to participate, two-year Internally Delegated Management Contracts were awarded for all NWSC service areas.

By 2004, as a result of consistent improvements in operations and cash management, the NWSC’s revenues exceeded operating costs (including depreciation) for the first time and the company was on the road to financial sustainability. Compared to its performance in 1998, coverage in the NWSC’s service areas increased from 48 percent in 1998 to 68 percent in 2006. Total connections increased from 50,826 to 125,000. Unaccounted-for-water was down to 31 percent (35 percent in Kampala and 16 percent in other service areas). Annual turnover increased from about US$11 million to US$30 million, and operating profit after depreciation improved from a loss of US$0.4 million to a surplus of US$2.2 million.

The government and the NWSC agreed to a third performance contract for 2006–09, which emphasizes the extension of services to the urban poor with the goal of achieving full coverage by 2015.

Source: Silva Mugisha. April 2006. Performance Assessment and Monitoring of Water Infrastructure: An Empirical Case Study of Benchmarking in Uganda; Triche, Thelma, and Steve Ostrover. March 2005. Assessment of the Long-Term Financial Sustainability of the NWSC, Report 1 of the Review and Update of the Implementation Strategy for Reform and Divestiture of the NWSC, submitted to the Ministry of Finance, Planning and Economic Development. See also Case Study 9, accompanying volume, and the NWSC’s website at www.nwsc.co.ug

Box 9: Regulation by Contract: The Senegal Lease Contract

In 1995, the Government of Senegal launched wide-reaching reforms in the urban water sector. The state-run water company was dissolved; a new asset-holding company, SONES, was created, and a private operator was engaged to run the systems. These reforms resulted in significantly better services and financial health for the sector. The contractual framework included a concession contract and a sector development contract between the government and SONES, and a contract with the private operator. This 10-year affermage (usually referred to as a ‘lease contract’ in English—though it is not really an accurate translation) was innovative in that it provided financial incentives for the private operator to achieve ambitious performance targets for leakage reduction, improvements in billing, and collection efficiency.

The regulatory framework was built into the contract and was coherent (that is, it linked service levels to tariffs), credible, and transparent. SONES’s monitoring capacity was strengthened through a practical training workshop early in the contract period, and an objective outside conciliateur was engaged when needed to verify performance and resolve conflicts. (Figure 3 illustrates these arrangements.) The operator’s remuneration was based on its performance and, although it was independent of the tariff, the government committed to gradually increasing tariffs to the full cost recovery level (including debt service) and had a strong incentive to respect this commitment because it was essential to ensure the financial health of the sector and expand services. Tariffs for water supply were increased about 3 percent (in real terms) per year over 1996–2002.

Several factors contributed to the success of the reform: the use of an appropriate form of contract that was tailored to local conditions; strong political will and good leadership within the government; a well-designed process; and flexibility and innovation when it was needed. Design and preparation included the development of a financial model that could be used to set and revise performance targets, project revenue requirements, and calculate the associated tariff increases. Good relationships among the parties and an effective dispute resolution process meant that the private operator and the state asset-holding company were able to reach an agreement on how the former was reimbursed for lost earnings when the latter experienced a delay in the completion of investments.

The reform has had positive outcomes for the poor, in part due to the nature of the operator’s incentives, and in part due to the government’s policy of subsidizing connections in low-income neighborhoods. However, in 2004, some issues still remained due to the tariff inequities that result when multiple households use a single connection, and the fact that nonpoor households were benefiting from the subsidized block of the tariff, especially if they consumed no more than 10 cubic meters of water per month.

Source: Brocklehurst, Clarissa, and Jan G. Janssens. January 2004. Innovative Contracts, Sound Relationships: Urban Water Sector Reform in Senegal. World Bank. Water Supply and Sanitation Sector Board, Discussion Paper No. 1.

Strengthen Capacity

The content of training programs must be broadened to target a wider range of actors and, in contrast to the historical emphasis on engineering and technical skills, focus attention on improvements in service quality, access, and sustainability. Programs to strengthen the capacity and professional development of sector professionals and service providers should include a variety of complementary components and approaches.

• Broaden the focus to include service quality, efficiency, and service for the poor: The content of training programs for WSS staff and managers needs to be broadened to include training in corporatization, private sector participation, tariff setting, financial and commercial management, benchmarking, customer and community relations, communications, and outreach to the poor.
• Move beyond conventional forms of training: Training programs need to be scaled up and new types of training mechanisms need to be introduced to meet the growing needs of the sector as well as to motivate and enable staff to serve the poor effectively. Intensive training programs, mentoring, on-the-job training, continuing education courses in formal institutions, short seminars, online courses, and study tours to locations where the poor are getting adequate services are among the many innovative approaches that can be used to meet these needs.
• Create incentives and buy-in: Without incentives and prospects for promotion, training is not likely to bring about any changes in services for the poor. Internal communications and awareness programs and incentives for staff to support the reform and improve services for the poor are essential. The creation of career paths that include specialization in services for the poor is also important to create professional pride and commitment.
• Target nontechnical audiences: In addition, training and awareness programs need to be aimed at policymakers, regulators, consumers and consumer associations, consultants, nongovernmental organizations, and private sector firms that support the WSS sector.
• Take advantage of existing materials: A large body of training materials has been created by the World Bank Institute (WBI) and by WSS training institutes in other countries. The potentially relevant materials need to be identified and adapted to the Indian context.
• Professionalize: A professional association of WSS service providers similar to that created in Indonesia (see Box 10) would help create a professional identity and a sector-specific constituency, provide training and certification programs, and offer valuable opportunities for networking. Promoting the development of local private service providers should be an essential component of the strategy.

Box 10: Professional Association of Indonesian WSS Service Providers

Municipal WSS services in Indonesia are provided by some 300 semi-autonomous municipal water utilities (PDAMs). After the financial crisis that hit the country in 1998, most water utilities struggled financially and the quality of the service provided deteriorated under the combined pressure of population growth, aging infrastructure, inefficiencies, and low revenue. Corporatization of water utilities, improved performance, and increased accountability and provision of timely and accurate information to decisionmakers—are part of the challenges to be met.

Water utilities are members of a Professional Organization of Water Enterprises (PERPAMSI), headquartered in Jakarta with 28 provincial centers. The mission of PERPAMSI is to assist its members improve the management of their water supplies, assets and finances, as well as to provide training and certify professional staff. In addition, PERPAMSI provides training in public awareness, negotiations with local governments, and customer outreach. A strong PERPAMSI is considered a strategic element for improving WSS services throughout the country. Through a training arrangement, the World Bank Institute assists PERPAMSI in the three areas of (a) public communications and information services; (b) performance benchmarking; and (c) utility staff training programs. The program includes the training of PERPAMSI’s trainers in its provincial centers; the trainers will in turn train staff in the member water utilities. WBI is also supporting PERPAMSI build stronger ties with universities and training institutions, to strengthen PERPAMSI’s capacity, and engage it in the delivery of appropriate training services.

Source: World Bank. January 2006. India Water Supply and Sanitation: Bridging the Gap between Infrastructure and Service. Background Paper, Urban Water Supply and Sanitation, p. 41.

• Outsource: It is often practical and cost-effective to increase capacity by contracting outside entities to provide specialized services (such as information technology, vehicle repair, community mobilization). Managers should identify the essential functions that should normally be carried out in-house and the functions that could be contracted out. Decisions about outsourcing must also take into account whether qualified companies or individuals are available to provide the service and whether outsourcing is cost-effective. The contracting of NGOs to liaise with slum communities by the Social Development Unit in Bangalore is an example of effective outsourcing (see Box 6).

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