Needed, a water policy that taps private sector
 

Published: Business Line, February 21, 2007

By Udai S Mehta

Daily wage earners pay up to 20 per cent of their incomes on water, and slum-dwellers pay Rs 5 for a can of water.

This is the true but sad picture of water distribution in India where the poor are forced to pay for water. Yet, the mere talk of privatisation of water raises waves of protests as if it should forever remain a free public good.

It is high time the country's water situation was assessed, especially as the Government has declared 2007 the Year of Water.

It is not only water, but the shortage of almost every type of infrastructure that is affecting the country's growth and consumer welfare.

For the Eleventh Plan, the Planning Commission has suggested that investment in infrastructure (road, rail, air and water transport, power generation, transmission and distribution telecommunication, water supply, irrigation and storage) would need to be increased from 4.6 per cent of GDP to around 8 per cent.

Since the state's resources are limited, an aggressive effort at promoting private investment through the Public-Private-Partnership (PPP) route is imperative.

Potential costs, benefits

However, the debate on potential costs and benefits associated with the participation of the private sector in water distribution is still on and not confined to India.

In the last decade, the private sector made forays into water supplies in several developing countries and the experiences have been diverse.

In some cases, private investors have brought in operational efficiencies and benefits to consumers, in others it led to manifold increase in tariffs without perceived improvements in delivery.

For instance, in Buenos Aires, privatisation through a concession agreement lead to improvements in coverage, reliability and reduced prices of water.

Driven by the profit motive, the private sector may not always care to serve consumers who are not remunerative. Though the private sector is expected to bring in operational efficiencies and arguably better accountability to consumers, in the absence of adequate incentives it may not be inspired to meet the social obligations. Therefore, attaining multiple policy objectives demands a careful design of the PPP initiatives. Recent experience suggests that government agencies often get into sub-optimal contracts, imperilling the entire project.

Opportunity abounds

At the conceptual level, the huge operational inefficiencies in most public sector water utilities offer enough scope for the private sector to earn attractive returns and also serve disadvantaged consumers. In practice, this has not happened in most cases.

In some instances, the efficiency gains were not passed on to consumers, while in others the agreement was not binding enough. However, by using performance-based management contracts to outline the technical and managerial skills of the private sector, public utilities could enhance their ability to tackle operational inefficiencies and improve their service.

One such success story is of Navi Mumbai, which has improved water and sanitation services by using performance-based contracts to manage its water distribution and transmission system. There was an increase of almost 45 per cent in revenues and a substantial drop in customer complaints. Performance-based contracts helped the utility provide better service even while cutting operational costs.

First successful PPP project

Tirupur in Tamil Nadu was the first town to implement a PPP water project. A thriving garments industry city, Tirupur required huge volumes of water for industrial use. A consortium of three private firms implemented the PPP project to ensure sustained supply of water. The project was designed on a Build-Own-Operate-and-Transfer (BOOT) basis for 30 years, after which it is to be transferred to the government.

Thanks to the project, Tirupur residents receive water everyday for four-six hours as opposed to receiving water alternate days. The numbers of household connections has increased by 8,000 and local industries have a reliable source of water.

In contrast to the Tirupur case, the Delhi Jal Board (DJB) has been running into controversy though privatisation has not happened as yet. Lack of transparency in the process is a major concern and the allocation of risks and potential rewards is drawing heavy flak.

At a time, when the DJB has a definite plan to invest huge public money in the next couple of years to improve supplies and reduce non-revenue water (NRW), the privatisation move is being questioned.

Thus, there is a need to have an independent regulator in place to set standards of service and to enforce the same. In this respect the steps taken by the Maharashtra and Gujarat Governments are noteworthy.

The Maharashtra government has become the first to set up a water regulator when it passed the Water Resources Regulatory Authority Act, 2005. The Gujarat Government is set to become the second State to have a water regulatory authority. The Gujarat Water Regulatory Commission Bill, 2006 aims to bring different departments under one roof for the purpose of water distribution, fixation of tariffs, and so on. The Karnataka Government too is in the process of setting up a water regulator.

Surely, the private sector can play an important role in supplying water, supplementing government efforts and investments. The managerial capabilities of the private sector can improve operational efficiencies and the quality of services. However, the success of PPP projects would depend largely on the capability of governments to negotiate deals that take care of the interests of disadvantaged consumers.

Transparency, the key

Maintaining transparency in the processes is another important criteria for the successful implementation of PPP projects. While the government will have to create an enabling regulatory milieu, the private sector needs to demonstrate a willingness to accept business risks associated with such projects.

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http://www.thehindubusinessline.com/2007/02/21/stories/2007022100090900.htm

Funding architecture for infrastructure
 

Published: Business Line, February 06, 2007

By Pradeep S Mehta

India needs something like $350 billion over the next five years to create the infrastructure necessary to sustain economic growth and satisfy consumer needs. According to the ebullient Vinayak Chatterji, chairman of the CII's Infrastructure Council, of this huge amount nearly 70 per cent has to come from the state; 20 per cent from the private sector (foreign and domestic) and 10 per cent from overseas development assistance, such as the World Bank and the ADB.

These figures are based on his analysis of the World Bank data of investment flows in developing countries over the past decade or so. As for the future, the ratio may change depending upon what actually happens. And that must happen, if we have to achieve the target, otherwise we won't be able to grow at 8-9 per cent.

In the last fiscal year (March 2006) the infrastructure investment was $28.4 billion or about 3.6 per cent of GDP. It is not known how much of this came from the private sector and nor are any data available, but it is close to the Chatterji diagnostic.

Considering the budgetary limitations of investing public resources, we need more private flows and reforms in financial sector so that the infrastructure investment reaches at least 8 per cent of GDP.

Creating modern airports

In terms of private investment, there are splendid examples in the case of the New Delhi and Mumbai airports, with private sector operators rebuilding them to create modern airports in partnership with the government.

In this case a constant revenue will be assured to the government under the Public Private Partnership (PPP) model, and the airports will revert to the state after 30 years. When the bids were invited, there was some opposition, but wisdom prevailed soon; we may see first-class airports in the two megapolis, as also in Kolkata and Chennai.

Minimum leakage

Already the success of the PPPs model is visible in the road sector. Done on transparent contracts, the PPPs have offered predictability to the private investors.

The architecture of these model concession agreements has ensured minimum leakage.

This article can also be viewed at URL:
http://www.thehindubusinessline.com/2007/02/06/stories/2007020600890800.htm

The invisible force that must not fail
 

Published: Financial Express, February 02, 2007

By Pradeep S Mehta

In the run up to the Union Budget, P Chidambaram, the finance minister, and Indian industry have locked horns over the price rise in manufactured goods. Industry has denied that this rise is artificial, and has sought to attribute the northward movement to an expanding economy. This perhaps ought to mean economies-of-scale, and declining prices as a result. But this is not happening because the manufacturing sector has its own peculiarities.

What the finance minister can do now is ensure that the amendments in the Competition Act, 2002, are adopted in the Budget session, as recommended by CII. It can provide the competition regulator with resources to ensure that there is some check on any attempt at collusion or industrial dominance that could result in artificial price escalation. For this, the government needs to deepen the preparatory work on the Competition Commission of India (CCI).

It took vigorous lobbying by the consumer movement, spearheaded by CUTS, during Yashwant Sinha’s tenure as finance minister in the late 1990s, for India to enact the new Competition Act in 2002. The objective was to free the force of competition in accordance with the changing needs of a globalising and liberalising economy. It would have replaced the archaic Monopolies and Restrictive Trade Practices Act (MRTPA) of 1969. The new law has not yet been implemented in full due to legal wrangles, but we hope it will be done before the year is out.

The legal wrangles were largely about who should head the CCI — whether it should be a retired judge or a retired bureaucrat. This two-way argument failed to address the issue of who is best qualified to examine issues of competition. Would someone younger, perhaps an expert with experience of diverse competitive spheres, not do a better job?

Anyhow, India’s apex court ruled that the government must respect the doctrine of separation of powers between the judiciary and executive. Finally, the government drafted an amendment in 2006, which sought a trade-off between the two, by proposing an appellate tribunal headed by a judge, and a commission, headed by an expert, as a regulatory mechanism.

However, this led to greater confusion. The amendment bill was debated by a parliamentary standing committee, which after many pow-wows with experts and the ministry of company affairs, submitted its recommendations to Parliament recently. The committee is not very happy with a few aspects of the amendment bill, such as the provision that all combinations (M&As essentially) over a certain high threshold of turnover/capital be notified, for the benefit of the competition regulator’s knowledge. It wants all combinations to be mandatorily notified.

That will not be very helpful. Businesses fear that a restructuring exercise, which should be their prerogative, could get tied into legal knots due to overzealous application of the law by retired civil servants with a control-and-command mindset legacy. Mergers are a regular feature of a liberalising economy, as businesses rationalise their operations and seek strategic integrations, and over-regulation would restrict the efficiencies and value accretions that they enable. Also, given the sheer number of M&As taking place in India, and the fact that most of these are inconsequential from a market dominance perspective, it would be inadvisable for the CCI to devote its limited resources to screening each and every merger.

It would be advisable to follow the principle of ‘enforcement by compliance’ rather than ‘enforcement by force’. Voluntary notification leads to lower enforcement costs for the regulator and lower legal costs for the merging parties, which is why it has been adopted by several regimes around the world. Nevertheless, given the possibility of some large combinations raising concerns of weakened competitive forces in the marketplace, we need voluntary notification to work like a Damocles sword. Merging enterprises will, on their own, apply for a regulatory clearance in advance, rather than face the threat of regulatory barriers post-consummation. On the other hand, the law also provides for suo moto action by the CCI, if it feels that a merger needs to be tested under the regulations.

Among the positive recommendations, the standing committee has agreed with CUTS’ submission that the CCI should not be staffed with MRTPC staffers, since this would defeat the purpose of a new law. We have always argued that the new authority should have staff with expertise in economics, law and such other disciplines geared to understanding the complex dynamics of market arenas. Cases of market imperfection, for example, require informed analysis of high calibre. Further, experience in competition law and policy is imperative, given that the new law will be applied on a rule-of-reason principle. The reasoning would have to be clear to all those acquainted with the case. It takes finer judgement to attack the abuse of dominance, for instance, rather than dominance itself—especially in cases of intellectual property rights (which have not been drafted in a clear manner).

A recent recruitment advertisement of the CCI solicits applications only from people working in government and/or government agencies, and that too for a one-year assignment. This severely limits the chances of hiring market talent, while giving good members of the civil services too poor an incentive to apply. For a regulator that requires human resources of extremely high quality, the recruitment policy needs a thorough rethink. And now, before it’s too late.

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http://www.financialexpress.com/fe_full_story.php?content_id=153427