Market formation

(ring-fencing demonstration zones, renovating distribution network, installing me-ters, introducing a well-functioning commercial system, and effectively em-ploying grassroot social intermediation by an NGO), without increasing the amount of bulk water supplied. Information is scarce, yet the World Bank data demonstrates that private participation in the Indian water supply and sani-tation sector remains limited until now. The highest investment with private participation reported in 2007 adds up to US$ 140 million, which is less than 10 per cent of the investments in China in the same year. The uncertain and unstable legal and regulatory environment and the current widespread policy of not recovering actual costs of the water service from user charges has not provided the guarantees private investors and lenders seek. Without aiming at full cost recovery of water tariffs, private sector participation in urban water and sanitation utilities cannot be a successful proposition.

South Africa

In South Africa, the possibility of private sector participation is also very controversially discussed. According to Muller (2007), the former Director-General of DWAF, South Africa has a history of effective public sector provi-sion of water. In his opinion, privatization pressures come primarily from the international debates and multilateral agencies such as the World Bank. As he explains, the first post-1994 water concession involved the British Biwater com-pany that found it difficult to raise private finance and to meet its investment targets, finally seeking additional subsidies from the national Government.

There are other examples of failed attempts of private sector involvement.

A five-year management contract for water services in Johannesburg was not renewed when it expired in 2005. The private operator had encountered strong opposition when trying to install pre-paid water meters in township areas. Yet, one of the surveyed expert states: “The government is averse to PPPs, but I cannot see that any other type of solution exists given the nature of the water crisis in South Africa.” As this statement and the World Bank data show, until now private participation in the water supply and sanitation sector has been rather limited.

Table 1.2: MARKETFORMATION

2005

Brazilian Urban Water and

Sanitation Innovation System

Chinese Urban Water and

Sanitation Innovation System

Indian Urban Water and

Sanitation Innovation System

South African Urban Water and

Sanitation Innovation System Percentage Sold

that is Metered

100 99 58 100

Operation Cost Coverage (ratio)

1.47 1.02 0.83 0.89

resources. This could be done by price mechanisms that incentivize the ratio-nalization of water use and the minimization of water pollution or by manda-tory regulations that enforce the adherence to minimum quality standards by the market participants. Ideally, the price for water use reflects not only the costs of production, but also its environmental externalities and social oppor-tunity costs. For various reasons, including incomplete information and moral issues, the implementation of the ‘true’ price of water is in reality not feasible.

Cost recovery prices, consumption-based water billing and increasing water tariffs however set incentives in the right direction. Some available indicators are given in Table 1.2.

Cost recovery is the declared policy goal in Brazil, China and South Africa, however only in Brazil water tariffs are already high enough to pay for the cost of service delivery; in China there are huge regional differences, prices are ris-ing, but generally still below cost recovery levels; in South Africa free water supply for basic needs is guaranteed; in India low-quality public water is often a free community service. Inaccurate consumption metering is still a common problem in Brazil. Starting from a very low level, China now has a policy of universal metering, and water companies are rapidly installing meters. In In-dia there is no systematic metering, but even for customers that are effectively metered the tariff is typically a uniform linear tariff.

Brazil

Some of the critical segments in Brazil’s water industry, particularly in the ar-eas of water loss and water reuse, offer large market potential for the appli-cation of innovative water technologies. Water reuse is becoming increasingly important in Brazil, especially in the large centres where water scarcity rep-resents high operational costs for water impounding and adduction. Recent

legislation imposing charges for collecting and disposing effluents in water bodies increases the demand for specialized consulting services and effluent treatment technologies.

An example of successful MARKET FORMATION instruments is the inno-vative Basin Restoration Program (PRODES) managed by the National Wa-ter Agency (ANA) that was introduced in 2001 by the federal Government.

It pays sanitation utilities for treating wastewater based on certified outputs.

Up to half of the investment costs for wastewater treatment plants are eli-gible to be reimbursed over three to seven years, provided that the quality of the wastewater discharged meets the norms. If the norms are not met re-peatedly the payment is suspended and the utility may be excluded from the programme. This provides strong incentives to properly operate and main-tain plants. Between 2001 and 2007 PRODES leveraged investments of about US$ 290 million in wastewater treatment infrastructure with subsidy commit-ments of about US$ 94 million.

China

Since 2002, the ongoing institutional reforms are modifying the supply-driven water system towards a user-pay market-driven sector. However, the incen-tives and enforcement mechanisms in place are weak, because the political system relies on an oversight system that evaluates municipal leaders on their overall compliance with policies and achievement of planning targets. An effective incentive system for ensuring sustainable and efficient delivery of municipal services still has to be developed. Programmes for evaluating and benchmarking urban water utility performance are generally weak at all levels of government. Cities and their utilities need to be supervised by a higher level of government to ensure compliance with national and provincial policies and standards. But, conflicting roles often inhibit the flow of information upward.

The tendency to increase water tariffs, to extend metering and to use block tariffs more frequently seems to have contributed to the diffusion of water use efficiency technologies within the Chinese domestic market. By inducing mar-ket demands, huge efforts have already been made to rationalize water use.

Cities throughout China have established Water Conservation Offices with the mandate to set and enforce plans for domestic, commercial and industrial wa-ter use. Wawa-ter conservation statistics are now published by the Ministry of Housing and Urban-Rural Development.

Choices about wastewater treatment technology are influenced by

rela-tively high national discharge standards. Many cities are also upgrading their water treatment plants with advanced and expensive technology to respond to the new National Drinking Water Quality Standards. China’s water sup-ply and wastewater standards meet or even exceed the highest international standards. In fact, national standards are so high that Browder et al. (2007) ar-gues they were unrealistic and non-enforceable for many cities and proposes the implementation of transitional standards that allow for more flexibility.

India

Although in 1995 the Central Pollution Control Board provided water quality standards for drinking and other urban uses, they do not constitute an inte-gral part of the recommendations of the various dedicated committees set for establishment of the norms and standards for supply of urban services. More-over, norms for quantity and quality of water supply and sanitation services are infrequently monitored and are often unmet when monitored. Even when failures are detected, service quality is not effectively enforced. In the words of an Indian expert, “fines and penalties do not work because of bureaucracy, non-quality assurance and corruption.”

South Africa

According to the surveyed water sector experts, South Africa has one of the best water legislations in the world, but it is not being implemented. Existing service standards are high, but according to Bluewater Bio, an international firm specialized in wastewater treatment, out of 1,600 wastewater treatment plants in South Africa at least 60 per cent are not meeting regulatory require-ments. “South Africa is currently experiencing a lack of service delivery and in some cases, the wastewater treatment facilities are not operating effectively and/or at full capacity to efficiently serve all stakeholders.” “Given the loss of governmental capacity, unhealthy relations exist with large firms, who are now capturing government data for private gain; but also selling solutions that are inappropriate.” Furthermore, “Fines are not implemented because of the Cooperative Governance clause in the national constitution, which has been in-terpreted to mean that one government department will never criticize another government department.” With the 2008 incentive-based Water Quality Regu-lation Strategy, DWA is now starting to put more emphasis on service quality monitoring.