Regulatory reforms in the environment infrastructure sectors

Need for reforms Growing population in India over the decades has constrained the availability of resources in both urban and rural areas, though the impact of lack of delivery of services has elt more in urban areas. In this changing liberalized scenario and because of increasing pressure on resources, there is a need for regulating the environment infrastructure. Environment infrastructure comprises basic services like water supply, sewerage, and solid waste management. Augmentation of water supply, sanitation, and solid waste services and improvements in service quality call for significant investments. As in other core infrastructure sectors, the state cannot finance all such developmental activities on its own. Thus, private investment will be required to augment the efforts of the state in this sector. However, the peculiarity of the environment infrastructure sectors, in terms of being basic minimum services, makes private participation in this sector particularly complex. First, since these sectors are essential to life, availability of these services to the economically disadvantaged groups at low delivery prices has to be ensured. Thus, universal service obligation is much stronger than, for example, in the telecom sector. This hasimplications for tariff determination and levels subsidy. Second, the health and sanitation aspects associated with environmental services are important, and these cannot be left to private operators withoutappropriate regulation. Third, unlike in other sectors, the predominant cost in such sectors is the cost of transmission and distribution, and not the cost of production or storage. As the scope for competition in distribution services is limited, the sector is characterized by a strong element of monopoly. Fourth, as most of the distribution system is buried, information on the network necessary to facilitate investment decisions is not easily available. At the same time, private investment would imply efficiency improvements with the introduction of managerial and technical expertise. Private participation can be achieved through different options reflecting varying degrees of private sector participation such as service contracts, operation and maintenance contracts, concessions to build and operate, and, finally, plain divestiture. These sectors also lead to unbundling into discrete segments, which makes it possible to use different options at the same time to attract private sector participation. For example, billing and collection can be given on a service contract even as a concession is awarded to build and operate a reservoir. It, thus, provides an opportunity to introduce low-risk options such as service contracts and first to improve efficiencies, and gradually move to the high-risk options to attract investments. Thus, any attempt to privatize this sector will have to address these issues so that neither the consumers nor the investors are dissatisfied in the ?liberalized? environment. The regulatory authorities will have to do a balancing act to secure the financial viability of the industry on one hand and protect the interests of consumers on the other. Also, as the scope of competition in infrastructure services is limited, the regulator will have to ensure that the utilities do not exploit their monopoly power at the expense of the consumers. In other words, the regulator will have to ensure that the universal service obligation in this sector is met. This is even more necessary if the utility is to be privatized. Finally, the gains from privatization are maximized with complete privatization of the utility where the maximum risk and responsibility lie with the private operators. The design of an independent regulatory oversight in such an environment gains greater significance. Issues in the environmental infrastructure sectors Based on the discussion above, some issues of concern in the delivery of environmental services in India are listed below. Institutional and regulatory arrangements Policy-making and regulatory functions There is an attempt in various parts of the country to separate policy-making functions from regulatory activities as in Gujarat and Maharashtra, where moves are afoot to set up independent regulatory agencies in this sector. In other states, however, there has been some strengthening of the existing regulatory institutions. The water and sewerage boards have been granted autonomy and financial independence as in Kerala, where the Kerala Water Supply and Sewerage Act, 1986, and the Kerala Water Authority aimed to become a largely autonomous and commercially oriented organization. In Chennai, the Chennai Metropolitan Water Supply and Sewerage Board was set up as a statutory body in 1978. It assumed the responsibilities of water supply and sewerage collection, formerly held by the municipal corporation. However, in practice, the performance of these boards varies. For instance, in Chennai, the water board has tariff-setting functions and does not need the state government?s approval. In Kerala, the Kerala Water Authority has no control over personnel policy, and water supply tariff revision remains subject to government approval. Institutional arrangements Water supply and sanitation involve a large number of institutions working at different levels, with negligible integration of their efforts and fragmented responsibilities. Although there is a national water policy, most states do not have a state policy for these sectors, because of which the roles of most institutions do not come out clearly. Also, there appears to be a lack of inter-sectoral planning, especially in the urban areas. Presence of many developmental agencies with differing priorities and a lack of synchronization of efforts leads to patch-work development and wastage of efforts and funds. Also, there is a need to strengthen the interface of water supply and the sanitation sector with other regulatory systems like prevention of water and environment pollution. Regulatory instruments The current regulatory regime in the environment infrastructure sectors relies on command-and-control type of instruments, more due to operational convenience rather than any efficiency criteria. However, in a number of countries, due to the rigidity of this form of regulation, the level of detail required, high costs, and the adverse nature of the process, there has been a move towards alternative forms of regulation like using economic instruments, community pressure, etc. Quality and coverage Service coverage in terms of availability of household latrines is very low in India. Water quality monitoring is not practised and measures to control the quality of water are rarely taken. Due to the high permeability of soil in most parts, the type of technology used for latrines, and the proximity and high density of open wells, there is a possibility of pollution of drinking water sources, especially the open dug wells, which are used by a large proportion of the population. Resource mobilization Private sector participation Incomes generated by local bodies and many state institutions fall acutely short of requirement for capital investment, operation, maintenance, and upgradation of services. Therefore, water supply and sanitation utilities depend heavily on state government grants, loans, and subsidies for daily operation and the central government for capacity augmentation. While traditionally, investments in the sector have been financed by the governments, it would be difficult for governments to continue providing financial support to such loss-making ventures, especially with growing emphasis on fiscal discipline in the post-liberalization era. Thus, private investment would be required to augment the efforts of the state in this key sector. Tariff reforms The environment infrastructure sectors are characterized by a low level of equilibrium. Here, a vicious cycle arising out of the inter-related factors such as poor finances, poor institutions, poor infrastructure, poor service, and consequently, a lack of willingness on the consumer?s part to pay up, is observed. As a result, revenue collections are poor, leading to inadequate generation of capital resources. This is also compounded by inadequate information systems in the sector. Inadequate resources also lead to a fragmented institutional structure besides ineffective management practices. Also, as the focus in the water sector is largely on the construction of new water supply schemes, adequate management skills have not yet developed. This led to an inadequate provision of services in the water sector, thereby leading to consumer dissatisfaction. Impact of political priorities, the traditional dependence of water supply and sanitation taxes on assessment of property value, not updated for years in most places, and the enforcement powers for tax collection lying with the revenue department contribute to institutional finance not being readily available. Improving sector information Information on sector status, sector institutions, resources, and their performance is not available systematically. Developing/managing sector information and access to comparative information/best practices is necessary to enable local suppliers to assess their performance and attain quality improvements. Decentralization and consumer participation Making the principle of the 74th Constitutional Amendment operational is a challenge in view of the range of ownership, past liabilities, and legal issues, besides possible resistance from local bureaucracy, and lack of incentives to local bodies. Thus, the transfer strategy will have to address these issues and develop incentives to beneficiaries by providing higher service at lower costs. Conclusion Greater private sector participation with institutional reforms is one way of addressing the issues in the environmental infrastructure sectors. However, as mentioned earlier, privatization is not a general panacea. Considerable thought will have to be given to the design of an appropriate regulatory oversight.