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VINOD CHHABRA
Any privatisation of a public utility is a complex exercise. But the watersector has several factors which make it particularly difficult. The Englishand French models of water privatisation have produced some of the mostinteresting innovations in this area. UK The management and ownership ofwater supply and sewerage system was fully privatised in UK in 1989. Thiswas done through sale of shares in 10 regional firms. The regionalsegmentation of privatised companies allows performance comparison betweendifferent companies and is used to introduce some competition among theseregional natural monopolies.
The economic regulation is overseen by Office of Water Services (Ofwat),which maintains a comprehensive data base and sets maximum price increasesfor each company. The model has an innovative concept of competition bywhich Ofwat collects data from one company to compare and analysis withanother. Thus manipulation of costs can be minimised. One major drawback ofthe British model is that Ofwat has little influence over quality andenvironmental aspects. The environmental aspects are looked after by theNational Rivers Authority. Thus consumers' interests are not fully takencare of by a single agency.
France
Against the regional structure of UK, the structure inFrance is highly localised. There are more than 36,000 local municipalities,some of which have been grouped for water supply and sewerage. Thesecommunes decide if the system should be run publicly or privately and underwhat contractual arrangements.
In France, seven River Basin Agencies were set up in 1964, which wererenamed as Water Agencies in 1992. Since river basins do not followadministrative boundaries, these Water Agencies can in theory avoid localpolitical conflicts. The Water Agencies are not only self-financing, buthave large budgets. Unlike in most countries, water and sewerage budgets inFrance are separate from the general budget by law and must balanceexpenditures with revenues.
A model for India
A study of the above two models reveals that even though the English modelhas proved that a water system owned and operated by private firms can worksatisfactorily under the effective control of a regulatory body, the systemin its entirety is not suitable for a country like India for two reasons.First, we still have an under-developed capital market. And second, outrightsale to private firms is fraught with political risks and thus may not takeoff smoothly.
On the other hand, the French model is too decentralised. What is needed isan integrated mix of the two models. The following broad approach isproposed:
The economic regulator has to ensure that the interests of all the customerswhether domestic, industrial or agricultural, are protected and there isneither any favouritism nor any discrimination with respect to the quantityor quality or price.
Since water systems are highly capital intensive, the payback periods arequite long. Therefore, large scale investments such as construction of dams,reservoirs, canals, etc will have to be made by the government, at least tobegin with. The water budget can subsequently take over the financial burdenof the government in phases. The body will also help in dissipating allwater disputes, ensuring adequate investment in infrastructural developmentand preventing monopolistic tendencies. Existing bodies like Central WaterCommission, Central Ground Water Authority, etc can be suitably restructuredto form this agency.
On a national level, we need to adopt the French concept of Water Agenciesfor managing major river basins, their tributaries, lakes, etc. Such amechanism can help in integrated development of water resources. Theagencies should be free to take decisions on allocation and pricing aspectsthus obviating all disputes.
The innovative English model needs to be adopted for private firms at aregional level whereby the RP1+K price cap mechanism can provide economicincentive to reduce costs and improve efficiency.
Wherever government bodies are privatised, the approach followed in UKshould be used. In the UK, the council staff working in the erstwhile waterdepartments formed themselves into in-house contractor organisation which isallowed to compete with other private companies. Due to this basicstructural change, they have become more responsive and efficient.
On a local level, either long-term concessions or short-term contracts maybe awarded in the area of supply and distribution. While contracting outservices, different areas may be awarded to different agencies to bring incompetition and have a comparative database. Concessions provide anincentive for operators to seek least cost output. However, there is littleincentive to invest own resources in improvement and expansion of assetssince the ownership lies with the state.
Concession systems have two key features which make them better options thandisinvestment. The first is the competitive incentives for efficiency, whilethe other is the reduction in the regulatory burden since the contractitself is the chief regulatory mechanism.
This broad approach to privatisation does not imply simply changing theownership or managerial characteristics of the industry. It involves makinga complex set of choices about all the factors influencing sectorperformance and creating conditions under which private involvement canyield the desired performance improvements.
The author is consultant (petroleum) with the Planning Commission
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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