Rationalising Charges: Urgent need for water tariff reforms to improve financial health of ULBs

Urgent need for water tariff reforms to improve financial health of ULBs

Water supply charges in India have historically been subsidised, leading to low cost recovery in water supply projects. Low revenue generation means less resources being available for operations and maintenance (O&M), leading to poor service levels and rickety infrastructure. With a recent explosion of 24×7 water supply projects under a slew of urban-focused schemes like the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and the Smart Cities Mission, there has been a renewed focus on reforms in the sector, including tariff reforms.

Pricing water right is expected to plug the leakage of water, while bringing down the non-revenue water (NRW) component in cities. Experts believe users are more likely to use water judiciously when there is a rational price tag attached to the commodity.

Policy enablers

Water supply is one of the major components of AMRUT and accounted for 55 per cent of the total funding of Rs 570 billion allocated under the scheme as of February 2017. The scheme urges urban local bodies (ULBs) to adopt a policy of differential user charges for both individual and institutional consumers including providing adequate safeguards to protect the interests of the vulnerable.

Additional funding of 20 per cent under the scheme is contingent on improvements in the levy and collection of user charges, among other things. For water, this entails drawing up an action plan to reduce water loss to less than 20 per cent, creating a separate account for user charges, and achieving 90 per cent efficiency in billing as well as collection of fees.

Low cost recovery

Typically, ULBs manage to barely recover the O&M costs of supplying water. These costs command a large share of life cycle costs for water utilities. The biggest component of O&M costs is power, which constitutes 50-60 per cent of the total operating expenses of water utilities.

In most cases, while fixing the water tariff, important factors such as actual water demand, consumption pattern, willingness to pay, cost of capital replacement, etc., are often not taken into consideration. As a result, tariff levels are far below the actual cost of production. For instance, the current water production cost of the Municipal Corporation of Greater Mumbai (MCGM) is about Rs 11 per kilolitre (kl) of water, but the pro-rata charge for households even at the highest slab is below Rs 5 per kl.

An inefficient revenue management system, poor collection efficiency and high unaccounted-for water therefore continue to deteriorate the financial position of ULBs. As a result, most of the municipalities and water boards lack the resources to improve their operational efficiency and deliver the optimal level of quality. Though some cities have taken initiatives in the recent past to improve billing and collection processes, the impact of these initiatives has been limited, and varies widely from city to city.

Recent reforms

While water tariffs have been increased by most ULBs, they are typically revised only once in a few years. Moreover, these revisions have met resistance, which is mainly political in nature.

Many ULBs in cities such as Delhi, Mumbai, Bengaluru, Hyderabad, Nagpur, etc., have moved towards volumetric charges based on actual water consumption, with incremental rates for every additional kl beyond a specified quantum of water per month, also known as the increasing block tariff (IBT) model. However, municipalities lack proper mechanisms to enforce appropriate differential pricing systems that could reward or penalise industries for water usage as well as improve local revenue collection.

In 2017-18, so far, several instances of tariff rationalisation have been noted across the country, in cities of different classes and sizes. At the start of the financial year, water tariffs in all ULBs in Telangana (excluding the Greater Hyderabad Municipal Corporation areas) underwent an almost threefold revision. This came after 2016-17 saw only 50 per cent of the revenue targets from water charges being met.

In June 2017, the Haryana Urban Development Authority increased water tariffs for Gurugram and Panchkula by 100 and 300 per cent respectively. The Panchkula hike came after 11 years. The Delhi Jal Board increased tariffs in 2015, though an anticipated hike in 2017 was held off. Water charges in Puducherry saw a sixfold hike in March 2017 but the same came after 27 years. Recently, in October 2017, the Coimbatore City Municipal Corporation announced plans to revise water charges, with the proposed changes expected to take water tariffs for residents up by three to five times.

Other ULBs that brought in tariff hikes recently include the MCGM, the Chandigarh Municipal Corporation and the Vadodara Municipal Corporation.

But, tariff reform is closely linked to collection efficiency and action against pending bills. Low collection efficiency and low cost recoveries primarily result from low metering coverage, faulty and obsolete pipeline networks, incorrect meter readings, the absence of proper customer records, high level of NRW, a high number of defaulters, and an unwillingness of customers to pay for basic services. On this front, several ULBs have taken action recently. Earlier this year, the Hyderabad Metropolitan Water Supply and Sewerage Board (HMWSSB) decided to undertake a detailed survey of 25,000 water connections in the city to improve collection efficiency. The HMWSSB has also engaged a service provider to ensure proper billing and collection of monthly water use charges.

In August 2017, the Public Health Engineering Department in Nagaland said that it would introduce water metering systems in Kohima city with the aim of being able to track usage and charge users on the basis of actual consumption. The Managalore City Corporation and the Nagpur Municipal Corporation have also initiated water supply disconnection drives against defaulters of water bills. Further, under several 24×7 water supply projects across cities, household meter installation and upgradation are key components, aimed at improving efficiency in collection of tariffs.

On the other hand, for non-metered connections (both domestic and non-domestic), ULBs use a flat rate based on the total area of the property or ferrule size of connection, the number of taps in a house or a fixed/variable monthly charge based on the annual rental value of the property.

The Ministry of Housing and Urban Affairs’ service level benchmarks prescribe 100 per cent metering coverage. Against this target, only 10 per cent and 55 per cent water metering was achieved in Chennai and Delhi, respectively, as of 2016. While Mumbai was better at 81 per cent, continuity of water services was for 2-6 hours against a 24×7 benchmark. Further, the NRW share is well above the prescribed benchmark of 20 per cent in most ULBs.

The way forward

Per capita water availability is expected to come down by 36 per cent by 2025 (from 2001 levels) as per government estimates. This is owing to demand surpassing supply. Therefore, the need for rationalising tariffs to encourage optimal water utilisation is an obvious imperative. Tariff rationalisation is one way of achieving this outcome.

The Global Water Tariff Survey 2017, while noting that South Asia is still among the cheapest in the world, said that tariff increases in India are part of a global trend of water tariff hikes. Worldwide, water tariffs have increased by 3.91 per cent on average, double the rate of inflation during this time.

Reforms with respect to user charges as well as collection efficiency together constituting water tariff reforms will determine financial sustainability of water utilities in India, while ensuring better services for all. However, ULBs will need to ensure that charges are rationalised only progressively and at defined frequencies.

While reforms have gathered pace over the past few years, ULBs will have to ensure that water use is correctly measured and paid for as per usage under progressive tariff slabs.

User charges and taxes are typically the mainstay of municipal revenues, and thus rationalising charges is pivotal to achieving financial sustainability and, in turn, ensuring proper maintenance of water supply infrastructure and services.