PPP Debate 8 Varley | The Water Page

Prepared for the “Best Management Practice for Water Conservation” Workshop, Supported by Sa-USA Bi-National Commission. 7-10 September, 1997 Hermanus, South Africa KyeongAe Choe Robert C. G. Varley Dr. KyeongAe Choe is an applied economist specializing in the area of water resources. She was trained at the University of North Carolina. Dr. Choe has published widely in the field of willingness to pay studies and has field experience of surveys conducted in Africa and Asia. She has worked at the Center for International Development at the Research Triangle Institute in North Carolina. Robert C. G. Varley is Senior Economist And Public Finance Specialist at the Center for International Development, Research Triangle Institute in North Carolina. From 1993-96, he was been Technical Director for Finance and Economics at the USAID-sponsored WASH and Environmental Health Projects in Washington, D.C. ACRONYMS  AME Academy for Mountain Environics CVM contingent valuation method DHS Demographic Health Surveys EHP Environmental Health Project FIRE Financial Institutions’ Reform and Expansion HUDO Regional Housing and Urban Development Office UFW unaccounted-for water UP Uttar Pradesh USAID U.S. Agency for International Development WTP willingness to pay (method or survey technique) WWD waterworks department hh household lcd liters per capita per day lhd liters per household per day m3 cubic meters mil. million mld millions of liters per day Indian rupees (US$1= 34 Rps, 1995) DEFINITIONS Consumption or Use of Water (in lcd or lhd) – Since the amount produced each day varies depending on electricity and aquifer conditions, this is a random variable. Pipe leakage is also a factor in how much water is delivered to public taps. The average lcd reflects a distribution of values that depends on topography, season, downtime, and the diameter of the delivery pipe. This study bases consumption estimates on responses to a consumer survey. These estimates reflect mean or expected usage in the wet and dry seasons. Demand for Water – This is based on the amount, expressed in m3, that a household or households in a service area will use, on the assumption that they pay a real cost per m3 consumed. Thus, demand implies a relationship between quantity used and price/cost per unit of quantity. Demand management is a way in which the consumption of water is brought into balance with the supply by the use of price. In practice, Dehra Dun’s needs are not being met, and the theoretical standard is simply a target for water supply. Supply is not affected in the short run by price. Currently, demand is very large at the marginal price of zero, but supply is fixed and inadequate to meet demand. Need for Water – Need or entitlement to water is frequently confused with demand. The need for water reflects, in this report, a typical planning assumption that 200 lcd are needed or deemed adequate for design capacity. Rated Capacity (in mld) – The result of multiplying the design discharge of 30 tubewells by an assumed 18 hours of operation per day, and adding available surface water supplies. This is widely quoted as representing the water supply available to Dehra Dun. It is an optimistic estimate and should be discounted by any shortfall in realized discharge (usually measured in m3/minute), downtime for repairs, and electricity failure. The regular-season capacity of Dehra Dun’s water supply is approximately 61 mld. Real Resource Costs – The sum of consumers’ financial (cash) costs and their economic (noncash) costs. Acknowledgements The work upon which this article is based is available as KyeongAe Choe, Robert C.G. Varley and H.U. Bijlani, “The Costs of Coping with an intermittent water supply: Estimating Willingness to Pay from Revealed Market Demand, Dehra Dun, Uttar Pradesh, India.”, October, 1996, available from Center for International Development, Research Triangle Institute, PO Box 12194, NC 27709-2194, USA. Many people have contributed to the successful completion of this research and apologies are made for any unintended omissions. The original concept was developed in conversations between David Foster, then of the RHUDO Office in Bangkok, and Rob Varley, then Associate Director for Economics on what was then USAID’s Water and Sanitation for Health (WASH) Project. The work was funded by the Urban Programs Division of the Global Environment Office(G/ENV) of USAID, and the Office for Population Health and Nutrition(PHN), Environmental Health Project (EHP.) Rob Varley and David Fernandes of EHP managed the project and conducted a start-up workshop in Dhaera Dun in September 1995. David Foster was the counterpart in Washington at Urban Programs, G/ENV and was ably assisted by Liz Satow (a one time Dhaera Dun resident.) John Austin of PHN and Tej Mathur of G/ENV had already conducted detailed reconnaissance of potential sites. The client for the research was the Housing Office of USAID in New Delhi (RHUDO/New Delhi). Mr Earl Kessler the RHUDO Director provided overall direction to the activity while Nabaroon Bhattacharjee, also of New Delhi RHUDO, was an excellent co-ordinator and colleague at all stages of the study. During the start-up period when the questionnaire was being field tested the team was assisted by Ms Marie Helen Zaerah of OEIL/IUP, a PhD candidate of the University of Paris, who has conducted a study of intermittent water supply in New Delhi. Andi Eicher, then of the Yale School of Forestry, whose parents live in neighbouring Massourie, provided some key assistance with coding and operation of the SAS statistical software at a critical stage after fieldwork had been completed and a mountain of data needed editing. The staff of the Academy for Mountain Environics did an outstanding job and stuck with what was a far more gruelling undertaking than they might have imagined. Special thanks to Dr R Sreedhar and Rumita Gupta. Editor Chris de Joy did a fine job on a difficult manuscript and final production was ably overseen by Betsy Reddaway of EHP’s Communications Unit and Darlene Summers did the word processing. As always, Dan Campbell, EHP’s librarian was a constant source of support and seemingly unobtainable materials. Finally we would like to thank Prof. Dale Whittington of UNC and Mir Anjum Altaf of the World Bank who provided advice at the start of the study and a very helpful review of the final draft of the report. Foreword This paper is primarily addressed to the problems of developing country municipal water suppliers. We use economic analysis to demonstrate that raising the price of water to a level sufficient to cover the costs of supply (and providing an incentive for conservation), need not make the poor worse off. When prices are freed from regulated levels (usually very low) and are allowed to reflect the cost of supply, the consequence will often be an increase in welfare for the poor. This apparent paradox (of an increase in price and increase in welfare) is explained by the commonsense realization that something which is essential, but is not in fact available on demand (at the regulated price) will cause consumers to incur additional costs (e.g. in walking long distances for water, or buying from vendors.) These “coping” costs add to the real price paid by the unserviced until the total cost to the consumer is such that the consumer is unwilling to make more trips or put another way incur more costs. Water is rationed by forcing coping costs on consumers to reduce demand to the available level of supply. When water is free ( no-one has clear rights and there is a zero tariff) the costs may be incurred in the form of fighting over limited supplies as well as travelling great distances in rural areas. When households are serviced with water connections, but there is no effective metering and supply is intermittent, households waste water by repeated refilling of storage containers. They may in fact be privately rational in leaving the taps open all the time. This article argues the logic of full-cost pricing from a poverty reduction perspective – while the new commercial price may be higher than the low regulated price, consumers are now able to obtain more water at a price they are willing to pay. In the case we studied in India supplies are only available, intermittently, for a short time each day and the price is very low in relation to the direct costs of supply. Econometric analysis suggests that increasing the tariff and metering would allow the poor to consume more, at a lower total cost than the present level of water consumption. South Africa’s problems are somewhat different to India’s although in poor urban and peri-urban areas there is a common need to reduce unnecessary consumption and wastage. In most situations demand regulation through full-cost pricing is the way to go, but for South Africa a slightly different strategy may be appropriate at this historical juncture. South Africa’s township consumers are frequently not charged the marginal cost of water due to both lack of metering and a political tradition of non-payment. Making such populations conscious of the value of water while at the same time trying to redress the inequities of apartheid society, make enforcing higher tariffs very difficult politically. The essence of the economic approach to analysis of water supply problems is that consumers and producers should face price incentives that reflect the opportunity costs or real value of water. A novel way of addressing both efficiency and equity objectives is through the use of “entitlements.” Through granting “basic needs water entitlements”, incentives to conserve can be introduced and simultaneously address equity issues such as the affordability of a certain basic right or entitlement. To work , the metering regime must allow consumers to gain from conservation. In South African townships an intermediate strategy to encourage conservation may be to grant a per-capita entitlement to water (say 80 lcd/household member), accompanied by a rigorous campaign of installing meters and enforcing payment. The novelty would be that to the extent that monthly consumption falls short of the entitlement, the household would receive a cash rebate, with the saved water being valued at the regular full cost price (and perhaps refunded at the start of the school year as a form of forced saving.) Consumption in excess of 80lcd (on an average monthly basis) would be billed at the full cost which faces the formal, modern, urban sector households. This would make the distributional subsidy transparent – either government would have to underwrite the rebates, or regular consumers (who consume much more than 80 lcd) would have to pay a slightly higher price (cross-subsidization.) Those who object that poor households might neglect their children’s need for water to make more money to finance “pleasure” will find objections to any other form of income transfer to the poor, equally “impractical” and “misguided.” The main value of this study for a South African audience is to caution the use of terms like “affordability” and “fairness” – while the intention may be good, the consequences of basing pricing policy on intangible concepts such as these, are that the poor may be made worse off. This lesson may be particularly relevant in rural areas where the hypothesis that rural dwellers will not pay for commercially priced water (or shouldn’t have to) may condemn them to a continuing regime of long hard hours carrying nominally free water back to their homes. Rob Varley October 1997 1. Introduction and Background Although many water supply projects have been implemented during the International Drinking Water Supply and Sanitation Decade (the Decade) we still appear to be far from achieving the goal of safe water for all. The World Bank’s annual development report of 1994 (World Bank, 1994) concluded that the share of households with access to clean water had increased by half over the Decade, but that the quantitative accomplishments were no reason for complacency. Despite progress in meeting coverage targets many problems remain due to inappropriate investments and poor quality of services. The UNDP-World Bank Water and Sanitation Program has reported that while the Decade’s achievements have been notable for rural water supply coverage, progress in urban areas has been seriously undermined by burgeoning population growth and migration to the cities (UNDP, 1990). One of the leading journals in water resources (Water Resources Research, 1993) has also published a special edition with a comprehensive discussion of the issues and problems of water resources in developing countries. Urban water supply systems in developing countries commonly exhibit the following characteristics: they are closely regulated, municipally owned,utilities or even departments, with varying degrees of financial independence; heavy regulation of tariffs for supposedly social ends requiring transfers (frequently from central government) both to cover operating costs and replacement/expansion investment; separation of water pricing decisions from both current operations and investment financing consumption is not metered; there is a high percentage of unaccounted-for-water; supplies are intermittent and strongly influenced by seasonal climatic factors; revenue collection is often insufficient to cover operation and maintenance costs. In combination these characteristics often result in intermittent service, poor water quality and low pressure. Low pressure, cracked and leaking distribution mains and open sewerage often result in serious public health hazards. Previous studies (Altaf et al., 1993; Singh et al., 1993) have concluded that if service is reliable, consumers are willing to pay substantial amounts for improved water supply. However, because urban water consumers view their existing intermittent water supply service as unsatisfactory, they are often reluctant to pay their water bills and revenue loss is usually high. Water engineers and public officials often misinterpret this poor cost-recovery as an indication that prices are too high to afford or that consumers’ willingness to pay is too low, rather than as an indication of unmet demand and dissatisfaction with the provided service. As a result, water utilities are in a predicament; to meet consumers’ demand for a better service, revenue collection will have to increase but consumers often do not believe a better service will be forthcoming and will not tolerate increases. It is difficult to persuade the public that increased tariffs are in their best interests. One way of breaking the vicious circle is to provide a convincing demonstration to the public that consumers can indeed “afford” to pay the full cost for a commercial service. This means showing that not only is there a transparent need for better water services but that even the poorest members of society want them and are willing (and hence able in the usual sense of the word) to pay something, for a basic or lifeline supply. A major technical advance in applied economics has been the use of contingent valuation(CV) techniques to estimate demand directly, although the studies have not always been enough to persuade governments and their constituencies of the “ability” of consumers to pay. Apart from the difficulties of correlating future water consumption levels (if the service level improved) to future tariff levels, a practical difficulty of implementing the contingent valuation method in developing countries context is its high cost. Considerable skill is required get sufficiently reliable data to support recommendations for increased tariffs (for example see NOAA , 1993). A conclusion from many demand or willingness to pay studies for water is that the demand for full-service supply (i.e. continuous, piped, potable and high pressure) is indeed high enough to enable full cost recovery (including the cost of capital.) What is often overlooked is that the poor consume much smaller quantities of water and since these represent absolute necessities they are a priority for even the smallest of budgets. To address equity and access (the so called “ability to pay issue”) and make tariff reform possible, a common strategy is to institute a block tariff system which supplies a basic need level of consumption (20-50 lcd) at a low or lifeline tariff. Higher levels of consumption attract increasing tariff rates, and the overall objective is to generate sufficient revenues from water sales to cover all the direct money costs and ideally, a target rate of return on capital. The core principles of a demand approach are the importance of demand estimation and management, and the need to develop and to manage domestic and commercial/industrial water supply using sound commercial operating principles. While the cost of a CV can be justified if the target market is large enough(for instance Third World megacities), many municipal water utilities supply relatively small populations – it is estimated that 65% of urban dwellers in the Third World reside in so called secondary cities with populations of less than a million. One of the most cogent arguments for tariff reform would be to show that the overall cost to consumers , when account is taken of the hidden costs of intermittent water supply, would be no greater than what they are already paying. Some of these hidden costs may include health problems but these are difficult to measure and will not fully enter into a consumer’s private willingness to pay as they are broad social benefits. Thus to make the coping cost argument convincing it is necessary to demonstrate that private costs incurred at the moment, as a result of having to cope with an intermittent supply, are higher than tariffs. This approach of estimating coping costs is an indirect way of measuring demand by revealed behavior. The hidden costs of an intermittent system, which although not directly visible as cash costs, have a value to consumers; they can be decreased by replacing an intermittent low quality water supply with a full service potable one. Coping costs for higher income households with access to piped water usually comprise investment in supplementary household storage, filters, and pumping equipment. For the poor the cost is to procure nominally free water by queuing for long periods at public taps and then walking home, or by purchasing from door-to-door vendors. There are few accounts of the costs of intermittent water supply in urban areas of developing countries, nor has the significance of consumer coping behaviours and costs been taken into account in demand management practices or water project investment policy. The practical research described in this paper was motivated by the desire to test this hypothesis (about coping costs) and to use the results (if they were positive) as the basis for public advocacy of commercialization of water supply. The main strategy was to conduct a rigorous sample survey of the North Indian city of Dehra Dun. While there have been many attempts to reform the water supply sector in India, policy makers and government officials have tended to be sceptical about the arguments of demand management proponents and have demanded rigorous proof. In-depth descriptions of intermittent water supply and estimates of their costs are used to project demand and bolster the case for both tariff and institutional reform (corporatization or commercialization of municipal water works.) 2 Approach and Methodology The selected site for the study was as a secondary city and corresponded to the sponsoring agency’s (RHUDO/USAID New Delhi) interest in piloting urban environmental management initiatives for key Indian states such as Uttar Pradesh. A secondary reason for choosing Dehra Dun was the high coverage of metering, the relatively educated population and relatively good condition of the distribution system and water source. Thus Dehra Dun was not selected so much because of its representativeness but because it was thought that the chances of demonstrating the benefits of a full cost commercial supply and getting public support for reform were good. The survey was based on a random-stratified clustered sample of 1,112 households drawn from the 1995 electoral roll. The data collected from the survey were used to generate both qualitative descriptions of coping strategies and an econometric estimate of the household demand for water. Separate estimates were prepared for households with their own connections and those using public taps. The so-called willingness-to-pay (WTP) methodology or contingent valuation methods (CVM) are controversial. One secondary objective of the study was to compare the WTP for improvements in supply by using conventional CVM, with the indirect estimates based on what consumers are already paying to cope with the consequences of an intermittent supply. The total cost of water was defined as Total cost/m3 = Fees paid to water supplier {investment in equipment (tanks, pumps, water filters, storage vessels) time spent collecting water} Coping costs are those elements within the brackets while the fees paid to the water supplier will be equal to tariff costs if consumption is metered and charges collected. Four specific hypotheses were formulated to guide the research design :- Customers’ willingness to pay for a continuous water supply exceeds the revenues currently received by the Dehra Dun water works department (WWD). Current coping costs (investment in storage and time costs) are at least as great as the amount paid to the Dehra Dun WWD from water billings. Full-service water supply is a commercially viable proposition. The poor, who use public taps, currently pay higher real costs for water than those who are connected. 3. Dehradun, India : Water Supply Conditions The city of Dehra Dun has a population of 290,000. Because of its attractive location in the foothills of the Himalayas and cool climate, Dehra Dun attracts tourists, seasonal migrant laborers who settle in slums, and students at boarding school. This floating population adds to Dehra Dun’s water demand at the driest time of the year. The influx of tourist and transient workers in the summer increases the population to 330,000 and groundwater sources are drawn down, rivers have dried up, and electricity failures result in extended periods without any piped water. Despite having extensive groundwater resources, working tubewells, and an extensive piped network, the water supply is intermittent, of low pressure, and frequently not potable. Low water pressure and rudimentary sanitation lead to infiltration of sewage into damaged water mains. Ninety percent of the households in Dehra Dun are equipped with a water meter, but hardly any are working or used as the basis for billing. Though most of Dehra Dun’s residents are connected to the municipal water system, only 25% are served by a sewer . Diarrheal diseases and kidney problems arising from dissolved salts in the water are a significant health problem, especially in the dry season. The low water pressure is partly a consequence of a gravity-fed system and partly a result of the practice of leaving taps open to catch whatever water is available. In the poorer sections of the community, with about 10,000 households, residents rely on 400 public taps. Although water is free to public tap users, heavy costs are incurred by the time spent in long queues. Although the overall capacity of the system can supply about 110 liters per capita per day (lcd) to households, this supply is very unevenly distributed among different user groups, geographical areas, and times of the year. Approximately 90% of the area’s annual rainfall occurs during the summer, late June to September, leaving the rest of the year with very little rain (about 30 mm per month). Because of Dehra Dun’s altitude and stratigraphy, maintaining an individual groundwater source in the city is expensive. Most consumers have no access to water other than through the municipal piped system.. Some large institutions operate their own tubewells, which they also use to serve their employees’ residences. Dehra Dun does not have a commercialized water vending activity, except some occasional tanker supply by the municipal water department (Dehra Dun Water Works Department: WWD) on request. According to the WWD, its annual physical losses are 22%. This figure is considerably lower than what is reported in studies of other water supply systems both in India and other developing countries. Losses are typically 40 to 50%; these usually include administrative losses. Based on the survey result, the unaccounted-for-water in Dehra Dun would be approximately 35%; i.e., the difference between the average water consumption (107 lcd) and the designed capacity (163 lcd). Appendix A contains a more detailed description of water supply characteristics and constraints in Dehra Dun. The general picture to emerge is that the problem is far more serious in the dry season when the main storage tanks are discharged into the mains for a limited period each day. Since 95% of meters are inoperative and accurate billing based on consumption a rariety; taps are just left open to catch whatever is available. Some consumers’ topography and connections allow them to use copious quantities of water in their gardens, while others, less fortunate, receive less than the recommended bare-minimum rations of 20 lcd. Users pay no additional charge for each additional unit of water they consume, and the pricing regime is effectively one of a free marginal cost of water once fixed charges are paid with intermittent and random availability. Billing amount is not consistent with the consumption amount, which causes revenue losses as well as frequent billing disputes. Constantly open taps lower water pressure contributing to high calcium deposits. Even though water is supposedly discharged regularly from the overhead tanks, the flow of water at the consumers’ taps become uneven depending on the supply of electricity, topography and the proximity to overhead tanks. Regulated supply hours are the results of multiple reasons; high fuel costs to run pumps, limited volume of storage tanks, dependency on electric supply, and of course not enough revenue to cover the operation of continuous supply. .The WWD has difficulty tracking down unpaid bills and unbilled water consumption, because it has not registered all its consumers, nor has it automated its billing process. According to the survey 14% of households did not receive a bill last year. Revenue is essentially determined by the zeal with which collection campaigns are pursued. Unaccounted for water was estimated to be 33% (the combinded effect of non-payment and leakage.) Almost all revenues are used to pay personnel salaries and little remains for repairs and maintenance. Revenues never actually cover costs and debts accumulate – the WWD reconciles its cash flow position by simply not paying its electricity bill (the state utility, which is run like the water department, will not cut off supply and is itself unable to ensure regular supplies or charge an economic tariff.) The WWD’s financial system operates according to political cycles and is driven by the overarching goal of meeting the payroll each month. We have estimated that to cover the real costs of water in Dehra Dun would require an average tariff of twice the current level (Rp 2.5 m3.) 4. The Coping Strategies of Households The average household in Dehra Dun consists of a family of five living in a single-family house with a monthly household income of Rps 4,850 ($143), from one person’s earnings. About 59% of the sample households own their homes and 41% rent. Some 7% of all sample households run commercial activities from home. Thus many of Dehra Dun’s residential water connections may be incorrectly registered. Almost everyone in the city has electricity, and more than 80% of sampled households have plumbing, kitchen, and flush or pour-flush toilet facilities in their houses. The typical household pays about Rps 175 ($5.15) for monthly utility bills, including water, electricity, and garbage collection. Ways of coping with an unreliable water supply include increasing their household’s water-holding capacity (quantity), enhancing water pressure (reliability), and purifying water (quality) via water tanks, electric pumps, and water filters, respectively. Most of the equipment needed to employ these strategies is readily available on the local market. Economic costs also include wage losses due to sickness from poor water quality, time spent boiling water for safety, and management of the on-site storage subsystem. These costs are however difficult to estimate.The most popular coping strategy is to increase the quantity of water available by obtaining storage tanks, while the least-used strategy is to improve water pressure and flow reliability via electric pumps and roof tanks. The poor remained as disadvantaged group, since they do not have any financial means to improve intermittent conditions. What about the poor?: Dehra Dun has about 822 public taps to serve residents who have no individual piped water connections. From the household sample, it is estimated that about 23 families use one tap (only 400 or so of the public taps are heavily utilized by households.) Some public taps are used infrequently, partly because they are located in middle to upper-class residential areas where every household has its own water connection, and partly because the taps are on main streets, where shopkeepers occasionally rely on them. Conversely, taps in low-income areas are used regularly. Thus, while the number of public taps appears to be sufficient, their location may not be optimal. Although public taps are generally located within a 34-meter radius of users’ homes, the average time spent to fetch water is about a half hour per trip, or 2.9 hours per day, as observed from the household survey results. During the dry season, the average time spent fetching water is estimated to increase to 3.7 hours a day (Table 4). Tap location also affects users’ coping behavior. In some places, families leave empty buckets in line at their tap well before it starts flowing. Usually small children accompany the buckets to keep an eye on them. Some public-tap users reported that they can easily spend almost half a day fetching water, with each trip taking an hour (5 minutes to get to the pubic tap, 20 minutes to wait in line, another 20 to fill up two 15-liter buckets, and 15 more minutes to return home with two heavy buckets). In addition, a family of four must make at least four (average six) trips a day for its daily water needs. Often those consumers, who are fortunate enough, hire a private contractor for about Rps 3,000 to provide them with an individual water connection. The low-income public expresses its frustration at the inconveniences of spending over 4 hours a day fetching water. The economic cost-benfit of their water supply activities clearly indicates that the hidden costs required to fetch free water from the public tap are much higher than the official tariff for those with connections. In one slum area, housing is clustered around the public tap usually within 30meters. Those families can look out the window to determine whether a line has formed, thereby alleviating the need to queue up; only the water pressure slows down attempts to draw water in this neighborhood. In another neighborhood, one person was assigned as keeper for scheduling and monitoring tap usage to avoid queues. Scheduling at this particular tap was set up such that once a family draws all the water it needs for the day, it informs the tap keeper so that he can alert the next users as to the tap’s availability. In this case, users treated the public tap as a common property rather than a free public utility. According to the household survey, about one-fifth of Dehra Dun’s public-tap users fall into this category and manage the source. Though coping strategies differ among tap users and tap locations, one hardship that public-tap users usually have in common is that they have very few resources other than their time. Time spent f