The Indian Economy Blog

January 16, 2008

Water Privatization in Kundapur

Filed under: Infrastructure — Karthik @ 12:01 pm

A couple of years back, as part of an academic project (which I had also blogged about in my personal blog), I’d talked about water privatization. I had said that it is a good thing even if it pushes up costs, because it now offers people the option to get piped water supply. The analysis went something like:

1. People who don’t currently have connections will now get connected. And once they are on the network, they have an option to get clean piped water.
2. For people who already have connections, their monthly costs will shoot up. Maybe double. However, given that the average water bill amount is quite low, and is an extremely small proportion of monthly expenditure. So small that even a 100% increase won’t have much of an impact.

It’s time to revisit that case, given that Kundapur, a coastal town in Karnataka has decided to privatize it’s water supply. To summarize, so far, this town was dependent on ground water. Now, they are getting water from the river Varahi. Residents have to pay Rs. 4000 for the connection (half of that refundable), and the monthly bill will come within Rs. 100, they’ve said.

There are two points to note here. Firstly, this is the first time that Kundapur is getting piped water supply. The second is that there is a huge up-front cost. When I had talked about privatization giving the option of water supply to everyone, I had said that the costs should be structured such that the fixed charge is low or non-existent, and only usage is charged. This way, I had said, there won’t be any adverse impact on the poor (who are outside the system in the first place).

In this context, a financial restructuring of the Kundapur plan might be necessary. The TMC and the water supply firm will have to work out a scheme where they heavily subsidize the up front fee (to say about Rs. 500) in exchange for a higher per-unit charge for water. That kind of a structure would have several benefits.

Firstly, it would be far more inclusive and more people would be brought into the safe water plan. More people would be able to buy the option to get safe drinking water. Secondly, a higher variable charge will also result in more judicious consumption, which is critical for a limited resource such as fresh water. Thirdly, due to the changed payment structure, the heavy users of water (more likely to be the rich and upper middle classes) will end up cross-subsidizing the low volume users (usually the poor). Thus, the adverse impact on the poor can be brought down, and the people who wil have to pay more would be those who won’t mind paying a bit extra.

Of course, there is still a long way to go. The private partner who will handle the operation and maintenance is yet to be selected. There are also bound to be a large number of protests against the privatization itself. The TMC needs to get past that. Also, it seems to be the first time when such an exercise is being conducted in the country. So, other hurdles also can’t be ruled out.

Nevertheless, this outsourcing of operation and maintenance of water supply is a welcome concept, and if implemented and priced in the right way, might become a model to emulate in the rest of the country.

14 Comments »

  1. Karthik,
    Interesting thoughts, but I have a few comments.

    1. “For people who already have connections, their monthly costs will shoot up. Maybe double.”

    I think even more. Once the scheme is running, the costs may continue to rise yearly. I would put my money would be on costs rising every year.

    2. “The TMC and the water supply firm will have to work out a scheme where they heavily subsidize the up front fee (to say about Rs. 500) in exchange for a higher per-unit charge for water.”

    In an ideal (socialist) world yes, subsidies would work, but if it isn’t a viable private business, it is not going to succeed, and the govt. will be left propping up an unprofitable private business.

    The reason for private players coming into this (or for that matter, any) market is to break even/turn a profit as quickly as they can. Second, the motives of a private business (maximising profits or shareholder value) are at odds with the motives of a body which is responsible for running water systems (continual investment in maintenance, improving infrastructure etc.)

    In the UK for example, private water companies are taking a lot of flak, because they haven’t invested in regular maintenance of pipes leading to the loss of some obscene amount of water..
    http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/06/22/nwater22.xml

    Have you seen this as part of your research? http://www.psiru.org/reports/2001-02-W-UK-over.doc

    The report is quite old, but the problems are still the same (I live in the UK.)

    Comment by Shekhar — January 16, 2008 @ 2:46 pm

  2. Kundarpur shows a definite “willingness to pay”…given the qualification that they don’t have a cheaper but inefficient govt run option…

    Still..the longevity and sustenance is yet to be ascertained.

    Also i don’t get the concept of a user charge higher than marginal cost. That will unnecessarily create winners and losers out of the people..staying for a few years to long staying households.

    Comment by Spiff — January 16, 2008 @ 8:20 pm

  3. Karthik,

    Water Privatisation might be a good idea from an environmental perspective however I’m not sure to what extent it might help. I believe it will worsen it for those at the bottom of the so called pyramid. Those who live on less than a dollar a day(and there are a lot of indians who fall in this category!), Also, It is not going to affect those with the means either, they would still fail to use it efficiently and be willing to pay for this.(Electricity is a good example)… I’m yet to read your paper on this… Will add to my comments after reading it.

    Comment by pracas — January 17, 2008 @ 6:39 pm

  4. According to the world water council “The human right to water entitles everyone to sufficient,acceptable,physically accessible and affordable water for personal and domestic uses” and some of the basic human rights such as right to life,right to food and right to education can not be realized without water.That said privatization or public- private partnership in water supply is a welcome concept.Real issue of debate is how to reconcile profit motive and affordability?

    Comment by just a thought — January 18, 2008 @ 1:27 pm

  5. [...] Source : The Indian Economy Blog. [...]

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  6. [...] at the Indian Economy Blog argues in favor of water privatization in spite of the higher costs it will lead [...]

    Pingback by Water Privatization | DesiPundit — January 18, 2008 @ 9:28 pm

  7. Water priv has been a disaster in Latin America, the people living in slums had to fight against this and thankfully they prevailed. Water is a basic necessity and to hand over control to profit seeking corps is just not the way in this matter. In some cases govt control is better. Can you imagine 911 calls being handled by some LLC and they check if you have paid dues before sending emergency response?
    When it comes to essential services the common good should be ahead of corporate profits and shareholder dividends.

    Comment by Sudha — January 18, 2008 @ 11:16 pm

  8. Water is certainly an essential commodity for life (whether it’s a human right or not is debatable) but so is food. Not many of us depend on “profit making” entities and not the government to supply us food. So i don’t see why profit per se, is a bad idea if the results are better from what they currently have.

    I think it’s entirely plausible that 911 calls are handled by private companies (I wouldn’t be surprised if this this is already the case in some places), we are talking about contracting out certain rights to companies by the government. As long there is a decent contract which ensures there’s infrastructure investments, etc. and there’s are good incentive structures in place, privatization can certainly work.

    My worry of course is knowing how governments work in South Asia the contracts would be awarded not on merit of quality of supply but by the campaign contributions made by the bidding company to the ruling party. This of course is a governance issue.

    Comment by Deane — January 19, 2008 @ 4:36 pm

  9. It will fail. Take it in writing from me. Shekhar and Sudha make good points. The writer is already talking about subsidies. It is also sad that the original post does discuss the well-documented failures of very similar exercises around the world. The fact that the ADB is pushing this plan makes me even more weary of its future.

    Good luck TMC! You will need it.

    Comment by hmmbut — January 19, 2008 @ 8:21 pm

  10. I wonder if any of you anti-privatization folks have seen the bustle of private water tankers in Indian cities and towns during summer? If you think these tankerfuls of water are bought only by the rich, check again. A study conducted by the erstwhile International Water Management Institute program in Vallabh Vidyanagar (Gujarat) concluded that “private water markets” (tankers) are thriving and a large part of the customers are low-income families (better-off families have borewells or piped supply). They also found that given the uncertainty of water supply and the time and effort spent in procuring even a basic supply of water, most lower-income families would welcome a dependable, private supply.

    Comment by Rahul — January 19, 2008 @ 11:08 pm

  11. Lets wait and watch. We will see the results soon.

    Rahul, ask the same tanker owners to build and infrastructure. You will see them shy away. They have business sense.

    Comment by hmmbut — January 20, 2008 @ 1:07 am

  12. Hi Karthik,

    Understand your concerns that poor cannot afford making the initial payment of Rs5000. While subsidising the initial costs (Fixed) and increasing the usage costs (variable) does allow this programme to reach out to the wider public especially the poor, it also contributes to poor people shelling out more money over a period of time than is the case now. If the logic is also to rationalise the usage of water this may not help much as the rich may not worry about paying the slightly increased monthly costs.

    I think they should come out with a more innovative approach here. My thoughts are to have a slab system based on the expected usage of water like in the case of electricity. But here even the initial costs also would vary depending on the water usage one would request for. Let us say if the starting slab is 10 units the intial costs could be kept at a bare minimum of Rs500 with the usage costs being priced at the lowest per unit value. For the next level the initial costs would be more than 500 along with the marginal increase in the unit price. This should allow the poor to get access to the water at a minimum price and force the elite to pay more for the excessive consumption that they make for their household purposes to cleaning and gardening. let me know if it doesnt make any sense at all!

    Comment by Sampath — January 22, 2008 @ 1:01 pm

  13. [...] that water will be one of the largest markets of the 21st century. So it is heartening to read stories like this one about a town in India: …Kundapur, a coastal town in Karnataka has decided to privatize it’s [...]

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  14. [...] “Declare water as a common property…“  How tragic? Private water is helping farmers in Gujarat and elsewhere make money by trading it. And the reason why water levels are falling in many parts of the country is precisely because water is de facto commonly owned, and absolutely free. Private ownsership will decrease shortages, will be environmentally sustainable, and will send the right price signals – unlike now when “water-guzzling crops like rice and sugarcane [are grown] in states like Punjab, Haryana, Rajasthan and Maharashtra, where rainfall is not enough to recharge aquifers“ Milton Friedman had obviously exaggerated when he said that “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand”. But even he would be surprised to know that “Even Cherrapunji, India, the wettest place on earth, suffers from recurrent water shortages.” Instead of out-leftying the left on water, the BJP needs to call for farmers to own their own water.  [...]

    Pingback by SWARAJ » The BJP gets agriculture horribly wrong — January 24, 2009 @ 12:19 pm

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