Why we need a water regulator

An outcome of the low level equilibrium in India?s urban water sector is that most service providers are not financially viable. The current institutional and regulatory framework, in fact, does not encourage efficiency. Little emphasis exists on performance improvement; rather, the current focus is only on physical expansion of water supply systems. There are no incentives to bring about changes in the existing unsustainable management of the water system. Incomes generated by local bodies as well as many state institutions fall acutely short of requirement for capital investment, operation, maintenance and upgradation of water services. Water charges are not sufficient even to cover operating costs. Thus, service providers depend heavily on state government grants, loans and subsidies for daily operation, and central government for capacity augmentation. To address some of these issues, a greater role for private sector to supplement efforts of the government and community based organisations is often suggested. Interestingly, existing institutions may not be able to evolve such approach because of political compulsions and weak governance. Admittedly, a fall out of the privatisation process is the likely increase in transaction costs. That will require mitigating. Activitiesof monopoly service providers would have to be regulated for protecting consumer interests. A strong regulatory framework would not only protect investor interests, but also balance them with public interests. Such a framework has to be outside the existing governmental set up, and should have an arms-length relationship with state governments as well as local bodies. Otherwise, no enabling environment will be created to ensure protection of consumer interests, and attract private investment. Even before the private sector participates in the water sector in a substantial way, a regulator must be positioned. First, there is a need to improve operational efficiency of utilities by aligning cost of supply with tariff. This would make these services more sustainable by incentivising utilities in the sector to improve their services and eventually make them more attractive to the private sector. Secondly, there is the need to set standards of service, and enforce the same. Only a regulator would be able to take an independent and long term view on these issues. In this respect, recent initiatives at the central level as also in states such as Maharashtra and Gujarat are noteworthy. Nevertheless, certain issues should be kept in mind. First, there is a need for reconciliation of regulatory jurisdiction over local bodies in view of the 73rd and 74th Constitutional Amendments, thus calling for their consent. Second, tariff regulation over the urban bodies can be indirect wherein the regulator can set tariff principles. Compliance with the guidelines then must be linked to the grants assistance from governments to these urban bodies. Tariff regulation should improve efficiency, and align cost of supply with charges on a progressive basis keeping in mind universal service obligations. Third, the regulator must lay down the quality of service and ensure their compliance. Fourth, water quality should be regulated either through regulatory intervention or orders by a designated authority. Finally, the issue whether the water regulator should be merged with the state electricity regulatory commission may be examined from the view point of better economies of scale and avoiding plurality of regulatory bodies at state levels.